How much should inflation targeters care about the exchange rate?

García, Carlos; Restrepo, Jorge; Roger, Scott

doi:10.1016/j.jimonfin.2011.06.017

Cited by 64 publications

(39 citation statements)

References 56 publications

(62 reference statements)

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“…Let us now consider the empirical evidence, which is also reviewed by Aizenman et al Further interesting normative work supporting this conclusion is given by Cecchetti et al (2000) and Garcia et al (2011) for example. 14 See, e.g., Taylor (2001).…”

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confidence: 78%

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

Käfer

2014

Review of Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe question of whether central banks should bear responsibility for financial stability is still unanswered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis. JEL Classification:E52, F33, F42

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confidence: 78%

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

Käfer

2014

Review of Economics

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“…It is worth noting, in this respect, that the research conducted by Garcia et al(2011) is considered as one of the most current and comprehensive studies of all studies focusing on the importance of exchange targeting in the inflation targeting framework in emerging countries. Based on a dynamic stochastic general equilibrium model, these authors tried to compare the impact of various monetary policy rules on economic performance in developed countries 8 with emerging ones.…”

Section: The Central Bank's Reaction To Exchange Rate Variationsmentioning

confidence: 99%

“…As discussed above, Garcia et al (2011) tried to look at the extent to which emerging countries can take the exchange rate into consideration in an IT regime according to the specificities of these countries. These authors use stylized models of financially-vulnerable "emerging" economy FVEE) and financially-robust "advanced" economy (FRAE) to compare the performances of monetary policy rules in the management of demands' shocks, costs' shocks and shocks affecting the risk premium.…”

Section: Hybrid Approach: Simultaneous Inflation and Exchange Targetingmentioning

confidence: 99%

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The Hybrid Approach of Inflation Targeting: What Opportunities for an Emerging Economy Like Tunisia?

Mehri¹,

Ameur²

2016

EJEF

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After economic crises happening in many emerging countries, flexible exchange rates became a required theoretical condition helping to target inflation. Many countries stopped using exchange rate as an anchor for monetary policy and started using inflation targeting framework. In emerging countries, monetary authorities work to stabilize the exchange rate because of their "fear of floating". They are against high volatility of interest rate allowing speculative attacks and causing free fluctuations of their national currency. To avoid uncontrolled market movements, they have to choose between active and public exchange rate management and tight inflation targeting. In the same vein, Central bank of Tunisia follows financial measures linked closely to inflation without focusing especially on monetary aggregates in order to study a possible transition to targeting inflation strategy. It uses a simple Taylor rule where interest rates adjustment are guided by the anticipated inflation deviation from its original target and also by the gap between observed and potential GDP.As an emerging economy with a high degree of financial vulnerability, and facing different shocks, Tunisia should adopt a hybrid rule of inflation targeting in an open economy. This hybrid rule explicitly takes into account the evolution of the exchange rate in the reaction function of the central bank.

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“…Examples are Batini et al (2003 andLeitemo and. Garcia et al (2011) find that inclusion of the level of the real exchange rate in a Taylor-type rule increases the variability of inflation and the output gap. They do, however, find that smoothing the real exchange rate helps reduce financial volatility without adding to inflation or output variability.…”

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confidence: 98%

The real exchange rate in Taylor rules: A Re-Assessment

Froyen

Guender

2018

Economic Modelling

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Abstract:Examining three flexible inflation targeting strategies, we find that a small concern for real exchange rate stability as a policy goal matters. First, it warrants the inclusion of the real exchange rate in Taylor rules and, second, it is sufficient to improve the performance of Taylor rules relative to optimal policy. Gains are substantial for domestic and REX inflation targets because a small weight on real exchange rate fluctuations makes optimal policy less aggressive. The gains under CPI inflation targeting are considerably lower.

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How much should inflation targeters care about the exchange rate?

Cited by 64 publications

References 56 publications

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

The Hybrid Approach of Inflation Targeting: What Opportunities for an Emerging Economy Like Tunisia?

The real exchange rate in Taylor rules: A Re-Assessment

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