Working Paper: NBER ID: w11092
Authors: Ozge Senay; Alan Sutherland
Abstract: A dynamic general equilibrium model of a small open economy is presented where agents may choose the frequency of price changes. A fixed exchange rate is compared to inflation targeting and money targeting. A fixed rate generates more price flexibility than the other regimes when the expenditure switching effect is relatively weak, while money targeting generates more flexibility when the expenditure switching effect is strong. These endogenous changes in price flexibility can lead to changes in the welfare performance of regimes. But, for the model calibration considered here, the extra price flexibility generated by a peg does not compensate for the loss of monetary independence. Inflation targeting yields the highest welfare level despite generating the least price \nflexibility of the three regimes considered.
Keywords: No keywords provided
JEL Codes: E52; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed exchange rate regime (F33) | price flexibility (D41) |
| inflation targeting (E31) | price flexibility (D41) |
| money targeting (E42) | price flexibility (D41) |
| expenditure switching effect (weak) (H31) | fixed exchange rate regime generates more price flexibility (F31) |
| expenditure switching effect (strong) (H31) | money targeting facilitates more price flexibility (E49) |
| price flexibility (D41) | changes in welfare performance of regimes (P27) |
| fixed exchange rate regime generates more price flexibility (F31) | welfare performance of regimes (P16) |
| inflation targeting yields highest welfare level (D69) | price flexibility (D41) |