Template-Type: ReDIF-Paper 1.0
Author-Name: Javier Garcia-Cicco
Author-X-Name-First: Javier
Author-X-Name-Last: Garcia-Cicco
Title: Alternative monetary-policy instruments and limited credibility: an exploration
Abstract: We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; 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. 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 rules: 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, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design.
Length: 56 pages
Creation-Date: 2022-06
File-URL: https://www.bis.org/publ/work1020.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1020.htm
File-Format: text/html
Number: 1020
Keywords: monetary policy rules, credibility, inflation expectations
Classification-JEL: E52, E31
Handle: RePEc:bis:biswps:1020