Efficient CPI-Based Taylor Rules in Small Open Economies
In a standard New-Keynesian model for a small open economy, we derive the efficient CPI inflationbased Taylor rule. We conclude that the natural rate of interest, based on CPI inflation, must be directly linked to the foreign interest rate, as well as to domestic productivity shocks. In this way this rule ensures that the real ex-ante CPI interest rate moves in the face of domestic and foreign shocks so as to induce efficient movements in consumption. The empirical evidence, on the other hand, shows that inflation-targeting central banks respond to movements in the foreign interest rate (Fed funds rate), besides reacting to expected CPI inflation and to the domestic output gap.
Year of publication: |
2013-07
|
---|---|
Authors: | Caputo, Rodrigo ; Herrera, Luis Oscar |
Institutions: | Banco Central de Chile |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Currency Mismatches, Balance Sheet Effects and Hedging in Chilean non-Financial Corporations
Cowan, Kevin, (2005)
-
Expectativas Financieras y la Curva de Tasas Forward de Chile
Herrera, Luis Oscar, (1997)
-
The Effect of Capital Controls on Interest Rate Differentials
Herrera, Luis Oscar, (1999)
- More ...