What to Aim For? The Choice of an Inflation Objective When Openness Matters

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dc.contributor.authorFroyen, R.T.
dc.contributor.authorGuender, A.V.
dc.date.accessioned2016-06-28T02:36:48Z
dc.date.available2016-06-28T02:36:48Z
dc.date.issued2013en
dc.description.abstractInflation targeting countries generally define the inflation objective in terms of the consumer price index. Studies in the academic literature, however, reach conflicting conclusions concerning which measure of inflation a central bank should target in a small open economy. This paper examines the properties of domestic, CPI, and real-exchange- rate-adjusted (REX) inflation targeting. In one class of open economy New Keynesian models there is an isomorphism between optimal monetary policy in an open versus closed economy. In the type of model we consider, where the real exchange rate appears in the Phillips curve, this isomorphism breaks down; openness matters. REX inflation targeting restores the isomorphism but this may not be desirable. Instead, under domestic and CPI inflation targeting the exchange rate channel can be exploited to enhance the effects of monetary policy. Our results indicate that CPI inflation targeting can deliver price stability across the three inflation objectives and will be desirable to a central bank with a high aversion to inflation instability. REX inflation targeting does well in delivering output stability and has a relative advantage in economies where demand shocks are predominant. In general, the choice of the inflation objective affects the trade-offs between policy goals and thus policy choices and outcomes.en
dc.identifier.citationFroyen, R.T., Guender, A.V. (2013) What to Aim For? The Choice of an Inflation Objective When Openness Matters. Seattle, WA, USA: Western Economic Association Meetings, 28 Jun-2 Jul 2013.en
dc.identifier.urihttp://hdl.handle.net/10092/12408
dc.language.isoen
dc.publisherUniversity of Canterbury. Department of Economics and Financeen
dc.rights.urihttps://hdl.handle.net/10092/17651
dc.subjectCPIen
dc.subjectdomesticen
dc.subjectREX inflation targetingen
dc.subjectdiscretionen
dc.subjecttimeless perspectiveen
dc.subject.anzsrcField of Research::15 - Commerce, Management, Tourism and Services::1502 - Banking, Finance and Investment::150201 - Financeen
dc.subject.anzsrcField of Research::14 - Economics::1401 - Economic Theoryen
dc.titleWhat to Aim For? The Choice of an Inflation Objective When Openness Mattersen
dc.typeConference Contributions - Published
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