Alternative monetary-policy instruments and limited credibility: An exploration

We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate are preferred, instead using either monetary aggregate or exchange rate as main instrument; arguments usually presented rational expectations full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited compare after shock external-borrowing costs (arguably one most important sources fluctuations emerging countries) three policy rules: Taylor-type rule interest rate, constant-growth-rate aggregates, fixed rate. analysis identifies relevant trade-offs choosing among highlighting specially role exchange-rate volatility shaping medium- long-term forecasts, its consequences design.