Optimal discretionary monetary policy in the open economy: Choosing between CPI and domestic inflation as target variables

Alfred Guender

Macroeconomics from University Library of Munich, Germany

Abstract: In open economy, a choice can be made between two measures of inflation for use as a target variable: CPI inflation or domestic inflation. This paper considers flexible and strict inflation targeting strategies and explores the circumstances under which a domestic inflation target is preferred to a CPI inflation target. This is done from the perspectives of the central bank and society as a whole. The quantitative results of this paper indicate that under suitable conditions the temporal properties of stochastic disturbances are instrumental in determining which inflation target is preferred. The choice of target variable from society’s viewpoint coincides almost perfectly with the choice of the central bank if the utility of the representative household serves as the welfare criterion for society. If qualitative aspects matter in the choice inflation target, then the role of temporal properties of the stochastic disturbances becomes less prominent. Policy conclusions are drawn with the help of a forward-looking model for a small open economy. This model has proper micro-foundations and exhibits two important features. First, the degree of openness affects the parameters of the IS relation and, second, under domestic inflation targeting, the existence of a direct exchange rate channel in the Phillips Curve impairs the perfect stabilising properties of monetary policy in the presence of demand-side disturbances.

Keywords: monetary policy; inflation target (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2004-04-29
New Economics Papers: this item is included in nep-ifn and nep-mon
Note: Type of Document - pdf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0404/0404038.pdf (application/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:wpa:wuwpma:0404038

Access Statistics for this paper

More papers in Macroeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).