Hybrid Inflation Targeting Regimes

58 Pages Posted: 2 Nov 2009

See all articles by Scott Roger

Scott Roger

International Monetary Fund

Jorge E. Restrepo

Banco Central de Chile

Carlos J. Garcia

Universidad Alberto Hurtado

Date Written: October 2009

Abstract

This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank's policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exhange rate smoothing because of the perverse impact of exchange rate movements on activity.

Keywords: Central bank policy, Demand, Developing countries, Economic models, Exchange rates, External shocks, Inflation targeting, Monetary policy, Risk premium

Suggested Citation

Roger, Scott and Restrepo, Jorge E. and Garcia, Carlos J., Hybrid Inflation Targeting Regimes (October 2009). IMF Working Paper No. 09/234, Available at SSRN: https://ssrn.com/abstract=1497233

Scott Roger

International Monetary Fund ( email )

700 19th St. N.W.
Washington, DC 20431
United States
+202 623-7314 (Phone)

Jorge E. Restrepo

Banco Central de Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Carlos J. Garcia

Universidad Alberto Hurtado ( email )

Erasmo Escala 1835
Santiago 6500620
Chile

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
119
Abstract Views
962
Rank
422,206
PlumX Metrics