Template-Type: ReDIF-Paper 1.0
Author-Name: Viktors Ajevskis
Author-X-Name-First: Viktors
Author-X-Name-Last: Ajevskis
Author-Workplace-Name: Bank of Latvia
Author-Name: Kristine Vitola
Author-X-Name-First: Kristine
Author-X-Name-Last: Vitola
Author-Workplace-Name: Bank of Latvia
Title: Fixed Exchange Rate Versus Inflation Targeting: Evidence from DSGE Modelling
Abstract: We evaluate implications of inflation targeting versus fixed exchange rate regime for the UK, Sweden, Poland, the Czech Republic, Estonia, Latvia and Lithuania, i.e. seven EU non-euro area countries. To this end, we estimate a small open economy DSGE model and simulate a model under estimated structural parameters and different sets of policy parameters. The results obtained are compared in terms of inflation, output gap and interest rate volatility. For inflation targeting countries, a policy switch to fixed exchange rate would entail 3–6 times higher inflation volatility. In the Baltic economies, a policy change to inflation targeting with fully flexible exchange rate would amplify inflation volatility 2–4 times, whereas the existing price stabilisation and exchange rate fluctuations within the ERM II bands would entail 3–6 times more volatile inflation. Policy simulations thus show evidence that in all the countries the existing monetary rule guarantees more stable inflation and output than under alternative regimes.
Creation-Date: 2011-07-25
File-URL: https://www.bank.lv/images/stories/pielikumi/publikacijas/petijumi/WP_2-2011-Ajevskis-Vitola.pdf
File-Format: Application/pdf
File-URL: https://www.macroeconomics.lv/sites/default/files/wp_2-2011-ajevskis-vitola.pdf
File-Format: Application/pdf
Number: 2011/02
Classification-JEL: C11, C3, C51, D58, E58, F41
Keywords: DSGE, small open economy, fixed exchange rate, inflation targeting, Bayesian estimation
X-File-Ref: https://repec.bank.lv/refs/wpaper201102.txt
Handle: RePEc:ltv:wpaper:201102