A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis (2019)
Through an appropriate choice of inflation objective – a real-exchange-rate-adjusted (REX) inflation target - the central bank can limit fluctuations in real economic activity which have become a cause of great concern in recent years in many small open economies. REX inflation targeting dominates CPI targeting from the standpoint of output gap stabilization. CPI inflation targeting dominates REX inflation targeting from the standpoint of stabilizing inflation, nominal interest rates and real exchange rates. These results help inform ongoing discussions of possible alternatives for the existing flexible inflation targeting framework
CitationRichard T. Froyen & Alfred V. Guender, 2019. "A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis," Working Papers in Economics 19/17, University of Canterbury, Department of Economics and Finance.
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KeywordsCPI; REX; domestic inflation targets; broad vs. narrow mandate
ANZSRC Fields of Research38 - Economics::3801 - Applied economics::380112 - Macroeconomics (incl. monetary and fiscal theory)
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Guender A; Froyen RT (2016)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, ...
International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle Guender, A.V. (University of Canterbury. Department of Economics and Finance, 2015)CPI inflation targeting necessitates a flexible exchange rate regime. This paper embeds an endogenous target rule into a simple open economy macro model to explain the UIP puzzle. The model predicts that the change in the ...
Guender, A.V. (College of Business and EconomicsUniversity of Canterbury. Department of Economics and Finance, 2011)Employing an optimizing framework, this paper shows that a target rule dominates a simple instrument rule when the focus of monetary policy is on CPI inflation. The target rule approach produces a systematic relationship ...