Credible Monetary Policy When Output is Persistent: Exchange Rate and Nominal Income Targeting

30 Pages Posted: 19 Jan 2004

See all articles by Sang-Kun Bae

Sang-Kun Bae

Korea Economic Research Institute

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Date Written: June 2003

Abstract

Distortions introduced by targeting nominal income growth, or an exchange rate peg, in the trade-off between inflation and output in the stabilization of shocks to supply and terms of trade cannot be eliminated simultaneously. If supply shocks are optimally stabilized, targeting an exchange rate peg yields relatively less bias in shocks to the terms of trade if the economy is relatively open. Optimal degree of conservativeness depends on shock selected for stabilization and on policy regime. Targeting a weighted sum of change in real exchange rate and nominal income growth is shown to replicate the optimal equilibrium without resort to a state-contingent rule.

Keywords: State-contingent rules, Exchange rate target, Nominal income target

JEL Classification: E52, E58, F41

Suggested Citation

Bae, Sang-Kun and Ratti, Ronald A., Credible Monetary Policy When Output is Persistent: Exchange Rate and Nominal Income Targeting (June 2003). Available at SSRN: https://ssrn.com/abstract=482142 or http://dx.doi.org/10.2139/ssrn.482142

Sang-Kun Bae

Korea Economic Research Institute ( email )

FKI bldg. 28-1
Yoido Yongdungpo
Seoul, 150-756
Korea, Republic of (South Korea)
+82-2-3771-0023 (Phone)
+82-2-785-0273 (Fax)

HOME PAGE: http://blog.naver.com/econ_bae

Ronald A. Ratti (Contact Author)

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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