Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS

Paul Conway, Aaron Drew (), Ben Hunt and Alasdair Scott
Additional contact information
Alasdair Scott: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No G99/4, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: In this paper, stochastic simulations of the Reserve Bank of New Zealand's new macroeconomic model, FPS, are used to examine the issue of which price index monetary policy should stabilise in a small open economy. Under the class of policy rules considered, targeting a measure of domestic inflation, which does not include the direct effects of exchange rate movements on the price of imported goods, results in lower variability in real output, nominal interest rates, the exchange rate and domestic price inflation. The result is robust if direct exchange rate effects influence agents' expectations of generalised inflation and if the policy maker is uncertain about how direct exchange rate effects influence expectations. Tracing out efficient policy frontiers under the two alternative targets illustrates that for a given level of CPI variability, output variability can be significantly reduced by targeting domestic price inflation.

JEL-codes: E32 E37 E52 (search for similar items in EconPapers)
Pages: 20p
Date: 1998-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://www.rbnz.govt.nz/-/media/ReserveBank/Files/ ... apers/1999/g99-4.pdf

Related works:
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:nzb:nzbdps:1999/04

Access Statistics for this paper

More papers in Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand Contact information at EDIRC.
Bibliographic data for series maintained by Reserve Bank of New Zealand Knowledge Centre ().