Towards a “New” Inflation Targeting Framework: The Case of Uruguay

Matias Escudero (), Martin Gonzalez-Rozada and Martin Sola

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.

Keywords: dynamic stochastic general equilibrium models; financial frictions; monetary policy; reserve requirements; inflation targeting; non-conventional policy instruments (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2014-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Toward a “New” Inflation-Targeting Framework: The Case of Uruguay (2014)
Working Paper: Toward a “new” inflation-targeting framework: the case of Uruguay (2014)
Working Paper: Towards a "New" Inflation Targeting Framework: The Case of Uruguay (2014)
Working Paper: Towards a “New” Inflation Targeting Framework: The Case of Uruguay (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2014_1

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