Open-Economy Inflation Targeting

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Abstract
The paper extends previous analysis of closed-economy inflation targeting to a small open economy with forward-looking aggregate supply and demand, and with stylized realistic lags in the different transmission channels for monetary policy. The paper compares targeting of CPI and domestic inflation, strict and exhibitable inflation targeting, inflation targeting instrument rules and the Taylor Rule, and inflation targeting and exchange-rate targeting. The paper also clarifies how a conditional inflation forecasts can be consistently constructed and used as an intermediate target variable when there are forward-looking expectations.

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