Exchange Rate Effects and Inflation Targeting in A Small Open Economy: A Stochastic Analysis Using FPS

2002 ◽  
Author(s):  
Benjamin Hunt ◽  
Paul Conway ◽  
Aaron Drew ◽  
Alasdair Scott
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Stochastic Analysis ◽  
Inflation Targeting ◽  
Small Open Economy ◽  
Rate Effects

scholarly journals A Welfare Based Approach for choosing the Inflation Targeting and the Exchange Regime in Tunisia

2014 ◽  
Vol 6 (12) ◽  
pp. 919-932
Author(s):  
Abdelli Soulaima
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Inflation Targeting ◽  
Exchange Rate Regime ◽  
Small Open Economy ◽  
Flexible Exchange Rate ◽  
Stochastic Dynamic ◽  
Consumer Prices ◽  
The Social ◽  
The Impact

The inflation targeting is considered as an attractive monetary policy strategy in order to handle the inflation rate and improves the credibility of the central bank. The paper provides a stochastic dynamic general equilibrium model with the specificity of employing a small open economy. This model analyzes the impact of different regimes of inflation targeting and exchange rate in Tunisia in terms of the welfare loss and describes some aspects of the Tunisian’s economy. The results displays that the social loss is higher under the managed exchange rate than the flexible exchange rate regime for all the shocks. Then in terms of the inflation targeting index, it demonstrates that the consumer prices index outperforms the domestic inflation except for the productivity shock, in contrast to the result of (Parrado, 2004). Finally the strict is superior to the flexible inflation targeting except with the foreign inflation and the domestic interest rate shock.

The long-run stability of a small, open economy under crawling peg regime

2002 ◽  
Vol 52 (1) ◽  
pp. 57-78
Author(s):  
S. Çiftçioğlu
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Risk Premium ◽  
Small Open Economy ◽  
Exchange Rate Policy ◽  
Price Stability ◽  
Output Stability ◽  
Long Run ◽  
The Exchange Rate ◽  
The Impact

The paper analyses the long-run (steady-state) output and price stability of a small, open economy which adopts a “crawling-peg” type of exchange-rate regime in the presence of various kinds of random shocks. Analytical and simulation results suggest that with the exception of money demand shocks, an exchange rate policy which involves a relatively higher rate of indexation of the exchange rate to price level is likely to lead to the worsening of price stability for all types of shocks. On the other hand, the impact of adopting such a policy on output stability depends on the type of the shock; for policy shocks to the exchange rate and shocks to output demand, output stability is worsened whereas for the shocks to risk premium of domestic assets, supply price of domestic output and the wage rate, better output stability is achieved in the long run.

scholarly journals A Theory of Foreign Exchange Interventions

2021 ◽  
Author(s):  
Sebastián Fanelli ◽  
Ludwig Straub
Keyword(s):  
Exchange Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Bond Markets ◽  
Pecuniary Externality ◽  
Optimal Intervention ◽  
The Exchange Rate ◽  
Intervention Policy

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

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