Dai, Meixing and Sidiropoulos, Moïse (2003): Inflation Targeting, Capital Mobility and Macroeconomic Stability.
Download (205Kb) | Preview
In this paper we examine the macroeconomic stability in a simple dynamic open economy model, in which monetary authorities adopt an flexible inflation-targeting regime in an environment with a liberalised capital account and flexible exchange rates. In this respect, inflation targeting is an essential part of a three-part policy (or trinity) that also includes flexible exchange rate and capital mobility. We show that a low degree of inflation targeting flexibility (i.e., central bank�s response is aggressive toward inflation) with a high degree of capital mobility implies a dynamically unstable solution in this simple rational expectations model. In contrast, when central bank adopts a high degree of inflation-targeting flexibility (accommodative central bank), stability can be ensured under any degree of capital mobility. Finally, under low degree of inflation targeting flexibility, it seems necessary to limit the degree of capital mobility in order to maintain stability in countries opening their economies to international capital flows, mainly in emerging market and transition economies.
|Item Type:||MPRA Paper|
|Original Title:||Inflation Targeting, Capital Mobility and Macroeconomic Stability|
|Keywords:||Inflation targeting, optimal monetary policy, capital account liberalisation|
|Subjects:||F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Date Deposited:||08. Mar 2009 02:36|
|Last Modified:||12. Feb 2013 04:38|
Amato, Jeffrey and Stefan Gerlach (2002), �Inflation Targeting in emerging market and transition economies: Lessons after a decade�, European Economic Review 46, 781-790.
Ball, Laurence (1999), �Policy Rules for Open Economies�, in John B. Taylor (Ed.) Monetary Policy Rules, University of Chicago Press.
Battini, Nicolleta, Richard Harrison and Stephen Millard (2000), �Monetary Policy Rules for Open Economies,� Bank of England Working Paper, September.
Bernanke, Ben S. & Mishkin,, Frederic S, 1997. « Inflation targeting: A New framework for Monetary Policy�, Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116.
Bernanke, Ben S; Laubach, Thomas; Mishkin, Frederick S; Posen, Adam S. (1999), Inflation targeting. Lessons from the international experience, Princeton University Press.
Collins, Sean and Pierre L. Siklos, (2004), �Optimal Monetary Policy Rules and Inflation Targets: Are Australia, Canada, and New Zealand Different from the U.S.?�, Open Economies Review, Vol. 15, No. 4, pp. 347-362.
Corbo, Vittorio, and Klaus Schmidt-Hebbel (2001) Inflation Targeting in Latin America.�Working paper n° 105, Central Bank of Chile.
Eichengreen, Barry (2002) �Can Emerging Markets Float? Should They Inflation Target?�Working Paper Series, Central Bank of Chile.
Fischer, Stanley (2001), �Exchange Rate Regimes: Is the Bipolar View Correct?� Mimeo, World Bank.
Jonas J. and F.S. Mishkin, (2003), �Inflation targeting in transition economies: experience and prospects�, NBER Working Papers 9667.
Leiderman, Leonardo and Lars E. O. Svensson, Eds. (1995), Inflation Targets, CEPR,London.
Masson, Paul R., Miguel Savastano, Sunil Sharma (1997), �The Scope for Inflation Targeting in Developing Countries�; IMF Working Paper No. 97/130.
Mishkin F. (2000), �Inflation Targeting in Emerging Market Countries », NBER Working Paper No. w7618.
Mishkin F. (2001), �Global Financial Instability: Framework, Events, Issues�, The Journal of Economic Perspectives, N° 13, pp. 3-20.
Mishkin, Frederic S. and Klaus Schmidt-Hebbel (2001), �One decade of inflation targeting in the world: What do we know and what do we need to know?�, NBER Working Paper 8397, National Bureau of Economic Research.
Mishkin, Frederic S. and Savastano, Miguel.(2001) �Monetary Policy Strategies for Latin America.� Journal of Development Economics 66, pp. 415-44.
Neuman, M. and J. von Hagen (2002), �Does inflation targeting matter?�, FRB of St. Louis Review 84(4), pp 127-148.
Orlowski, Lucjan T. (2000), �Direct Inflation Targeting in Central Europe�, Post-Soviet Geography and Economics, Vol. 41, No. 2. pp. 134-154.
Svensson, Lars E.O. (1996), �Commentary: How should Monetary Policy Respond to Shocks while Maintaining Long-run Price Stability?� In Achieving Price Stability, Federal Reserve Bank of Kansas City, 209-227.
Svensson, Lars E.O. (1997), �Inflation Targeting in an Open Economy: Strict or Flexible Inflation Targeting?� Public Lecture held at Victoria University of Wellington, New Zealand, November 18, 1997.
Svensson, Lars E.O. (1999): �Inflation Targeting as a Monetary Policy Rule�. Journal of Monetary Economics 43:607-654.
Svensson, Lars, E. O. (2002), �Inflation Targeting: Should It Be Modelled as an Instrument Rule or a Targeting Rule? � European Economic Review 46, pp. 771-780.
Taylor John B. (2000), �Using Monetary Policy Rules in Emerging Market Economies�, presented at the seminar Stabilization and Monetary Policy: The International Experience organised by Banco de México on November 14 and 15, 2000.
Taylor, J. B. (1993), �Discretion versus policy rules in practice�, Carnegie Rochester Conference Series on Public Policy, vol. 39, pp. 195-214.
Taylor, John B. (1996), �How should Monetary Policy Respond to Shocks while Maintaining Long-run Price Stability?� In �Achieving Price Stability�, Federal Reserve Bank of Kansas City, pp. 181-195.
Von Hagen, Juergen and Zhou Jizhong (2005) �The Choice of Exchange Rate Regime in Developing Countries: A Multinational Panel Analysis�, Journal of Banking and Finance 29, pp. 227-248.
Willett, Thomas D. (2002), �Fear of Floating Needn�t Imply Fixed Rates: Feasible Options for Intermediate Exchange Rate Regimes�, For Fordham/CEPR Conference on Euro and Dollarization, March 2002.
Williamson, John (2000), �Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option�, Policy Analyses in International Economics 60, Institute for International Economics, Washington, D.C..
Wyplosz, Charles (2001), �Exchange Rate Regimes: Some Lessons from Post-war Europe, CEPR Working Paper No. 2723.