Balance of payments crises under inflation targeting

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Pages (from-to)242-264
Journal / PublicationJournal of International Economics
Volume71
Issue number3
Publication statusPublished - May 2007

Abstract

This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share. © 2006 Elsevier B.V. All rights reserved.

Research Area(s)

  • Balance of payments crisis, Exchange rate targeting, Flow speculative attack, Foreign exchange intervention, Inflation targeting

Citation Format(s)

Balance of payments crises under inflation targeting. / Kumhof, Michael; Li, Shujing; Yan, Isabel.

In: Journal of International Economics, Vol. 71, No. 3, 05.2007, p. 242-264.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review