The central bank's optimal reaction to foreign and domestic shocks is analyzed in an inflation targeting model allowing … that the interest rate response to foreign shocks is smaller when pass-through is low. Second, the inflation …-through ; exchange rate volatility ; inflation targeting ; monetary policy ; small open economy …

reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, is welfare enhancing in all pass …-through cases. This result is moreover independent of whether society values domestic or CPI inflation stabilization. The only case … inflation and output, are sub-optimal. -- Exchange rate pass-through ; monetary policy ; simple policy rules ; small open …