Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249236 
Year of Publication: 
2021
Series/Report no.: 
Economic Research Working Papers No. 91
Publisher: 
Banco Central de la República Argentina (BCRA), Investigaciones Económicas (ie), Buenos Aires
Abstract: 
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.
Document Type: 
Working Paper

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