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Explicit and Implicit Targets in Open Economies

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Sgherri, Silvia

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Abstract Under a <i>flexible</i> inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation–targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for <i>core</i> inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate.
Document language English
Publication Year 2008
Page/Pages p. 969-980
Journal Applied Economics, 40 (2008) 8
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)