Journal of International Economics 50 (2000), 155-183.
Abstract
The paper examines inflation targeting in a small open economy
with forward-looking aggregate supply and demand with
microfoundations, and with stylized realistic lags in the
different monetary-policy transmission channels. The paper
compares strict and flexible targeting of CPI and domestic
inflation, and inflation-targeting reaction functions and the
Taylor rule. Flexible CPI-inflation targeting does not limit the
variability of CPI inflation but also the variability of the
output gap and the real exchange rate. Negative productivity
supply shocks and positive demand shocks have similar effects on
inflation and the output gap, and induce similar monetary policy
responses.
JEL Classification: E52, E58, F41.
Download PDF file (0.4 MB).