Inflation Targeting and Exchange Rate Co-ordination

Fernando Alexandre (), John Drifill () and Fabio Spagniolo ()
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John Drifill: Birkbeck College
Fabio Spagniolo: Birkbeck College

No 9/2001, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: In a linear rational expectations two-country model, using an aggregate demand-aggregate supply framework, we analyze the effects of the adoption of an inflation targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor Rules perform relatively well.

Keywords: Inflation Targeting; Taylor Rule; Exchange Rate Coordination; Rational Expectations. (search for similar items in EconPapers)
JEL-codes: E17 E52 E61 F42 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (1)

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