Hybrid Inflation Targeting Regimes1
Jorge Restrepo () and
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Jorge Restrepo: Banco Central de Chile, http://www.bcentral.cl
Scott Roger: IMF Institute, International Monetary Fund, Washington D.C.-USA
ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business
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 is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. 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 activity.
Keywords: Inflation targeting; monetary policy; exchange rate (search for similar items in EconPapers)
JEL-codes: E42 E52 F41 (search for similar items in EconPapers)
Pages: 54 pages
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ila:ilades:inv226
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