Predetermined Exchange Rate, Monetary Targeting, and Inflation Targeting Regimes
Many works analyzing the Mundell-Fleming dictum compare the predetermined exchange rate regime and the monetary targeting regime under flexible exchange rates. Reflecting on the fact that many emerging market countries have shifted to the regime of inflation targeting, this paper aims to extend the literature to include the inflation targeting regime. The results of our analysis show that the interest rule with an inflation target is superior (or at least equal) to the two abovementioned regimes in absorbing both real and monetary shocks.
optimal exchange rate regimes, predetermined exchange rate, flexible exchange rate, the Mundell-Fleming dictum, small open economy
RIEB, Kobe University
Rokkodai-cho, Nada-ku, Kobe