Inflation targeting and exchange rate volatility smoothing: A two-target,two-instrument approach |
| |
Institution: | 1. Borsa Istanbul, Research Department, Istanbul 34467, Turkey;2. Middle East Technical University, Department of Business Administration, Ankara 06531, Turkey;3. Central Bank of the Republic of Turkey, Markets Department, Ankara 06100, Turkey;4. Borsa Istanbul, Business & Product Development Department, Istanbul 34467, Turkey;1. Department of Economic and Social Sciences, Catholic University, Piacenza I-29122, Italy;2. Department of Economics, School of Business, College of Staten Island and Graduate Center, City University of New York, United States;1. School of Economics, Ocean University of China, China;2. Department of Finance, Ocean University of China, China;3. School of Economics, Shandong University, China |
| |
Abstract: | This paper introduces a strategy to model a small open economy, whose central bank has established two simultaneous policy objectives: an inflation target, and a maximum limit for nominal exchange rate volatility. In line with the Tinbergen–Aoki condition, the monetary authority establishes two policy instruments, one for accomplishing each target: the monetary policy rate, and the stock of foreign exchange reserves. Monetary policy analysis is built around a non-microfounded augmented New Keynesian DSGE model estimated through Bayesian techniques for the Guatemalan economy. It is found that each instrument is efficient in accomplishing its own target. Nevertheless, a coordinated effort is required for central bank policymakers before employing both instruments simultaneously, in order to avoid sending mixed signals to economic agents about its monetary policy stance, and endanger the achievement of its inflation target. |
| |
Keywords: | |
本文献已被 ScienceDirect 等数据库收录! |
|