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Inflation Targeting, Exchange Rate Volatility and International Policy Coordination

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  • Fernando Alexandre
  • John Driffill
  • Fabio Spagnolo

Abstract

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.

Suggested Citation

  • Fernando Alexandre & John Driffill & Fabio Spagnolo, 2002. "Inflation Targeting, Exchange Rate Volatility and International Policy Coordination," Manchester School, University of Manchester, vol. 70(4), pages 546-569, June.
    • Handle: RePEc:bla:manchs:v:70:y:2002:i:4:p:546-569
    DOI: 10.1111/1467-9957.00300
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    Cited by:

    1. Noha Emara, 2012. "The Welfare Effects of Inflation Volatility and Institutions," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 4(1), pages 5-27, January.
    2. Chadha, Jagjit S. & Nolan, Charles, 2007. "Optimal simple rules for the conduct of monetary and fiscal policy," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 665-689, December.
    3. Kwack, Sung Y., 2005. "Exchange rate and monetary regime options for regional cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 57-75, February.

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