In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open eco...

Abstract: Inflation targeting (IT) has recently become a popular monetary policy tool to fight inflation in advanced as well as emerging market economies. IT is assumed to curtail inflationary expectations; aiding monetary authorities implement disinflationary policies. The evidence toward IT’s role in anchoring expectations in practice can be at best described as mixed, if not confusing. In th...

We study optimal monetary policy for a small open economy in a model where both domestic prices and wages are sticky due to staggered contracts. The simultaneous presence of the two forms of nominal rigidities introduces an additional trade-off between domestic inflation and the output gap. We derive a second-order approximation to the average welfare losses that can be expressed in terms of th...