Dealing with Time Inconsistency: Inflation Targeting versus Exchange Rate Targeting

J. Scott Davis, Ippei Fujiwara, Jiao Wang

    Research output: Contribution to journalArticlepeer-review

    5 Citations (Scopus)

    Abstract

    Adopting a single instead of multiple targets can be an effective way to overcome the classic time-inconsistency problem. The choice of a single mandate depends on the trade openness and the credibility. Reduced-form empirical results show as central banks become less credible, they are more likely to adopt a pegged exchange rate, and the tendency to peg depends on trade openness. In a model with “loose commitment,” as credibility falls, either an inflation target or a pegged exchange rate is more likely to be adopted. A relatively closed (highly open) economy would adopt an inflation target (exchange rate peg).

    Original languageEnglish
    Pages (from-to)1369-1399
    Number of pages31
    JournalJournal of Money, Credit and Banking
    Volume50
    Issue number7
    DOIs
    Publication statusPublished - Oct 2018

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