Alternative Targeting Regimes, Transmission lags and the Exchange rate Channel

Jean-Paul Lam

Macroeconomics from University Library of Munich, Germany

Abstract: Using a closed-economy model, Jensen (2002) and Walsh (2003), have, respectively shown that a policy regime that optimally targets nominal income growth (NIT) or the change in the output gap (SLT) outperforms a regime that targets inflation, because NIT and SLT induce more inertia in the actions of the central bank, effectively replicating the outcome obtained under precommitment. We obtain a very different result when the analysis is extended to open-economy models. Flexible CPI-inflation targeting outperforms both SLT and NIT and is the most robust targeting regime. The gains from targeting CPI inflation are particularly large when the model features transmission lags and/or departures from the uncovered interest parity condition. We also find that the stabilization bias inherent in discretionary policy is smaller in an open-economy setting.

Keywords: discretion; commitment; exchange rate expectations; targeting regimes; transmission lags. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-09-04, Revised 2003-12-03
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - PDF; prepared on UNIX sunblade100; to print on HP/PostScript/Franciscan monk; pages: 26; figures: included
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Citations: View citations in EconPapers (7)

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Working Paper: Alternative Targeting Regimes, Transmission Lags, and the Exchange Rate Channel (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0309005

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