Inflation Targeting and Sudden Stops

Ricardo Caballero () and Arvind Krishnamurthy

No 9599, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Emerging economies experience sudden stops in capital inflows. As we have argued in Caballero and Krishnamurthy (2002), having access to monetary policy during these sudden stops is useful, but mostly for insurance' rather than for aggregate demand reasons. In this environment, a central bank that cannot commit to monetary policy choices will ignore the insurance aspect and follow a procyclical rather than the optimal countercyclical monetary policy. The central bank will also intervene excessively to support the exchange rate. These inefficiencies are exacerbated by the presence of an expansionary bias. In order to solve these problems, we propose modifying the central bank's objective to (i) include state-contingent inflation targets, (ii) target a measure of inflation that overweights non-tradable inflation

JEL-codes: E0 E4 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-afr, nep-ifn and nep-mac
Note: CF EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published as Inflation Targeting and Sudden Stops , Ricardo J. Caballero, Arvind Krishnamurthy. in The Inflation-Targeting Debate , Bernanke and Woodford. 2005

Downloads: (external link)
http://www.nber.org/papers/w9599.pdf (application/pdf)

Related works:
Chapter: Inflation Targeting and Sudden Stops (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9599

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9599

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().