Alternative Monetary Rules in the Open-Economy: a Welfare-Based Approach
Eric Parrado () and
Working Papers Central Bank of Chile from Central Bank of Chile
Using an optimizing model we compare alternative monetary policy rules and exchange rate regimes for a small stochastic open economy with imperfect competition and short run price rigidity. The criteria to choose among rules and regimes are obtained using a welfare criterion derived from the utility function of the representative agent. The main findings of this paper are that, depending on what shocks affect this economy, the effects of inflation targeting on output and inflation volatility depend crucially on the exchange rate regime and the inflation index being targeted. With regard to the exchange rate, we find that the loss in agents’ welfare is much higher under managed exchange rates than under flexible rates in presence of real shocks, while for nominal shocks the reverse is true. As far as the definition of inflation targeting index is concerned, domestic inflation appears to outperform the CPI. Finally, flexible inflation targeting is welfare superior to strict targeting.
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-lam, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Chapter: Alternative Monetary Rules in the Open Economy: A Welfare-Based Approach (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:129
Access Statistics for this paper
More papers in Working Papers Central Bank of Chile from Central Bank of Chile Contact information at EDIRC.
Bibliographic data for series maintained by Claudio Sepulveda ().