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Inflation Targeting, Exchange Rate Volatility and International Policy Coordination
Author(s) -
Alexandre Fernando,
Driffill John,
Spagnolo Fabio
Publication year - 2002
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00300
Subject(s) - economics , exchange rate , volatility (finance) , interest rate , monetary policy , monetary economics , aggregate demand , portfolio , rational expectations , macroeconomics , inflation targeting , real interest rate , econometrics , financial economics
In a linear rational expectations two–country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation–targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well.