Macroeconomic Stabilisation: Fixed Exchange Rates vs Inflation Targeting vs Price Level Targeting

Vivek Dehejia () and Nicholas Rowe ()

No 99-15, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We argue that the traditional question ‘fixed vs. flexible exchange rates?’ is not well-defined, because ‘flexible exchange rates’ does not explicitly specify any particular monetary policy. In traditional analyses, ‘flexible exchange rates’ was interpreted as implying a fixed money supply. But fixing the money supply (or fixing its growth rate at k%) is rarely advocated nowadays. To reflect today’s policy debate, the traditional question should be replaced by the question ‘fixed exchange rates vs. inflation targeting vs. price level targeting?’. We then build a simple macroeconomic model of a small open economy. The model incorporates an ‘outside lag’ in the effect of monetary policy on aggregate demand, so that inflation targeting and price level targeting are always imperfect. We use this model to compare the stabilisation properties of three different monetary rules: a fixed exchange rate, a fixed inflation target, and a fixed price level target. We show that price level targeting is best for stabilising output, the real exchange rate and the real interest rate, relative to their natural rates.

Keywords: exchange rates; inflation targets (search for similar items in EconPapers)
JEL-codes: E12 E52 E58 F33 (search for similar items in EconPapers)
Pages: 15 pages
Date: 1999-09, Revised 2000-03-22
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published: Carleton Economic Paper

Downloads: (external link)
http://www.carleton.ca/economics/ccms/wp-content/ccms-files/cep99-15.pdf Full text (application/pdf)
None

Related works:
Working Paper: Macroeconomic Stabilization: Fixed Exchange Rates Vs Inflation Targeting Vs Price Level Targeting (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:car:carecp:99-15

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Carleton Economic Papers from Carleton University, Department of Economics C870 Loeb Building, 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada.
Bibliographic data for series maintained by Court Lindsay ().