Alternative monetary-policy instruments and limited credibility: An exploration

Arbeitspapier

We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate's role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economic Research Working Papers ; No. 91

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Garcia-Cicco, Javier
• Event: Veröffentlichung
• (who): Banco Central de la República Argentina (BCRA), Investigaciones Económicas (ie)
• (where): Buenos Aires
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/249236
• Last update: 10.03.2025, 11:45 AM CET