European Parliament Library

Balance of Payments Crises Under Inflation Targeting, Shujing Li, Isabel Yan, Michael Kumhof

This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share
Table Of Contents
Contents; I. Introduction; II. TheModel; A. Households; B. Firms; C. Government; D. Equilibrium; E. Unsustainable Policy; III. Model Solution; A. Parameter Values; B. SolutionMethod; IV. The Dynamics of Speculative Attacks; A. Model Dynamics; Figures; 1. (a) Overview (Full Accommodation); 1. (b) LaborMarket (Full Accommodation); 1. (c) Price Levels and Inflation Rates (Full Accommodation); 1. (d) Government Budget (Full Accommodation); Tables; 1. Reserve Loss Ratios - Central Bank Accommodates Money Demand at t=0; 2. Reserve Loss Ratios - Central Bank Ensures Smooth Target Paths at t=0
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (28 p.)
Specific Material Designation
Form Of Item

Library Locations

  • EP Library Luxembourg

    Rue du Fort Thüngen, Luxembourg, L-1313, LU
  • EP Library Brussels

    60 rue Wiertz, Brussels, B-1047, BE
  • EP Library Strasbourg

    7 Place Adrien Zeller, Allée du Printemps, Strasbourg, F-67070, FR