The Choice of Nominal Targets in an Open Economy

Monetary anchors play a central role in the practice of monetary policy in LFDCs. Not all LFDCs have an explicit monetary anchor, but if so they rely on three alternative frameworks: exchange rate targeting, monetary targeting, and inflation targeting. This chapter discusses, for each nominal anchor, the advantages, drawbacks, and prerequisites for adopting it, the modalities of implementing it, strictly or flexibly, and the various challenges it raises. The presentation combines theoretical arguments, discussions of empirical evidence, and analysis of selected experiences of LFDCs. The special case of anchors in dollarized economies is examined in depth. The chapter contains two appendices. The first deals with international reserves and their international borrowing arrangements. The second is a case study of monetary unions in sub-Saharan Africa.

Delegating Optimal Monetary Policy Inertia in a Small-Open Economy

This paper explores the delegation of several targeting regimes in a small open new Keynesian (NK) model and examines how central banks overcome stabilization bias in a small open NK model. Results indicate that both speed limit and real exchange rate targeting can carry the isomorphic properties of optimal monetary policy over to the closed economy. In addition, neither nominal income growth targeting nor CPI inflation targeting replicates a commitment policy. These findings provide new implications for optimal monetary policy in an open economy.

Exchange Rate Targeting Versus Inflation Targeting: Empirical Analysis of the Impact on Employment and Economic Growth

This paper analyses the effects of two alternative monetary strategies (exchange rate targeting and inflation targeting) on economic growth and employment. On the panel of 18 countries for the period from 1996 to 2013, I tested the hypothesis that countries in exchange rate targeting have a higher rate of GDP growth and lower inflation rate. In order to test the impact of exchange rate policy on economic growth and prices, I applied dynamic panel two stepwise method of least squares (2SLS method) and they were evaluated by two independent regression equation. In order to allow the comparison of results related to exchange rate targeting, the effects of the introduction of inflation targeting in the unemployment rate were also estimated using the panel method two stepwise least squares (2SLS method). Results of empirical studies show that countries with inflation targeting have a lower rate of economic growth and higher unemployment.

Monetary Policy and Economic Growth in Lebanon

The central bank of Lebanon adopted exchange rate targeting in 1994 and it has exploited several instruments (particularly interest rate) since then to stimulate foreign financial inflows. This study aims at testing the impact of this strategy on economic performance and welfare in both the short- and long-run. In this regard, we exploit monthly data covering the period January 2002-June 2017 and implement cointegration analysis and VEC model. The empirical results suggest that monetary tools exploited by the central bank of Lebanon depress economic growth in the long-run. Moreover, despite their importance for external balance, financial inflows may hinder economic activity in both short- and long-run. On the other hand, monetary policy transmission channels through bank credit and capital play a constructive role for GDP growth.

Monetary policy regimes and growth revisited: evidence from a de facto classification

Pioneered by New Zealand in 1990, a growing number of countries have adopted the practice of inflation targeting, the international experience of which has been reported as satisfactory. However, existing empirical evidence fails to support inflation targeting as having a positive growth effect. To provide further evidence, this study adopts a new classification system for monetary policy regimes that allows the empirical estimation of the effect of inflation targeting on economic growth in comparison with its main alternative, exchange rate targeting. Our study, which covers more than 100 countries for the 35 years from 1974 to 2009, presents robust evidence that inflation targeting promotes economic growth.