Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-Through
نویسنده
چکیده
This paper develops a dynamic general-equilibrium (DGE) model of a small open economy to investigate alternative monetary rules, differing primarily in the degree to which they allow for exchange rate flexibility. A central argument of the paper is that the nature of the trade-off between fixed and floating exchange rates may be quite different in mature industrial economies than in emerging-market economies. The critical distinction is the degree to which movements in the exchange rate pass through to domestic consumer prices. With very high exchange rate pass-through, all monetary rules face a significant trade-off between output (or consumption) volatility and the volatility of inflation. Policies that stabilize output require high exchange rate volatility, which implies high inflation volatility. But with limited or delayed pass-through, this trade-off is much less pronounced. A flexible exchange rate policy that stabilizes output can do so without high inflation volatility. We also argue that the best monetary policy rule in an open economy is one that stabilizes non-traded goods price inflation. Finally, we show that a policy of strict inflation targeting is much more desirable in an economy with limited pass-through.
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Aguerre, R.B., Fuertes, A. M. and Phylaktis, K. (2012), "Exchange Rate Pass-through into Import Prices Revisited", Journal of International Money, 31: 818-844. Bailliu, J. & Fujii, E. (2004). "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation", Bank of Canada Working Paper No. 21. Carlsson, M., Lyhagen, J., and Österholm, P. (2007)...
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