This paper examines the effects of monetary policy undertaken to achieve an exchange rate target under a managed floating exchange rate system. It is motivated by evidence that central banks have at times geared monetary policy to exchange rate targets. Using the well-known Dornbusch model with...

This paper develops a model of inflation targeting in a small open economy under floating exchange rates. The central bank follows a simple Taylor rule to achieve a target inflation rate, and the inflation process itself is determined by an expectations augmented Phillips curve mechanism. The...