Hybrid Inflation Targeting Regimes

Carlos García, Jorge Restrepo and Scott Roger

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It finds that including an element of exchange rate smoothing in the policy reaction function is helpful for handling risk premium shocks by either financially robust advanced economies or financially vulnerable emerging economies. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on economic activity.

Date: 2009-12
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Citations: View citations in EconPapers (26)

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Working Paper: Hybrid Inflation Targeting Regimes (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:533

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