Economic Growth under Alternative Monetary Regimes: Inflation Targeting vs Real Exchange Rate Targeting

24 Pages Posted: 27 Mar 2008 Last revised: 17 Apr 2008

See all articles by José Antonio Cordero

José Antonio Cordero

Escuela de Economia, Universidad de Costa Rica

Date Written: October 2007

Abstract

A Post Keynesian model is developed to examine the main features and consequences of a monetary regime based on inflation targeting. The growth performance of this regime is compared to the one resulting from real exchange rate targets. Inflation targeting is shown to hurt growth and employment performance. Real exchange rate targeting, on the other hand, allows placing the economy on a higher growth path, but the trilemma hurts inflation performance. This problem may be mitigated by adjustments in the legal reserve requirement rate or capital controls. Long-run dynamics is shown to be stable in both regimes, as long as there is enough nominal wage flexibility. The model generates endogenous economic growth. Finally, it is argued that the formalization of the monetary sector provides a bridge between monetarist interpretations of inflation and the Keynesian emphasis on effective demand.

Keywords: Economic growth, inflation targeting, real exchange rate

JEL Classification: E12, E31, E58, O42

Suggested Citation

Cordero, José Antonio, Economic Growth under Alternative Monetary Regimes: Inflation Targeting vs Real Exchange Rate Targeting (October 2007). Available at SSRN: https://ssrn.com/abstract=1028031 or http://dx.doi.org/10.2139/ssrn.1028031

José Antonio Cordero (Contact Author)

Escuela de Economia, Universidad de Costa Rica ( email )

San Jose
Costa Rica
(506) 2511-3300 (Phone)

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