Balance of payments crises under inflation targeting ¬リニ

This paper analyzes a small open economy model under a monetary regime that targets the consumer price index. It is explained why such a regime is vulnerable to speculative currency attacks. There are two differences to the exchange rate targeting case: (i) The attack takes place over a short period of time as opposed to instantaneously. (ii) Reserve losses attributable to the attack are smaller, and increasing in the share of tradable goods in total consumption. Furthermore, it is shown that targeting domestic (nontradables) inflation would completely eliminate speculative attacks. Corresponding Author: Michael Kumhof, Assistant Professor, Department of Economics, Room 322, Stanford University, Stanford, CA 94305. Tel.: 202 421 4521, Fax: 650 725 5702, email: [email protected].