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A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis

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Abstract
Through an appropriate choice of inflation objective – a real-exchange-rate-adjusted (REX) inflation target - the central bank can limit fluctuations in real economic activity which have become a cause of great concern in recent years in many small open economies. REX inflation targeting dominates CPI targeting from the standpoint of output gap stabilization. CPI inflation targeting dominates REX inflation targeting from the standpoint of stabilizing inflation, nominal interest rates and real exchange rates. These results help inform ongoing discussions of possible alternatives for the existing flexible inflation targeting framework.

Suggested Citation

  • Richard T. Froyen & Alfred V. Guender, 2019. "A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis," Working Papers in Economics 19/17, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:19/17
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    More about this item

    Keywords

    CPI; REX; Domestic Inflation Targets; Broad vs. Narrow Mandate;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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