Inflation Targeting and Exchange Rate Management In Less Developed Countries PDF Download

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Inflation Targeting and Exchange Rate Management In Less Developed Countries

Inflation Targeting and Exchange Rate Management In Less Developed Countries PDF Author: Mr.Marco Airaudo
Publisher: International Monetary Fund
ISBN: 1513567438
Category : Business & Economics
Languages : en
Pages : 65

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Book Description
We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.