Towards a 'New' Inflation Targeting Framework: The Case of Uruguay

92 Pages Posted: 25 Feb 2014

See all articles by Martín González-Rozada

Martín González-Rozada

Universidad Torcuato Di Tella

Martín Sola

Universidad Torcuato Di Tella; University of London - Economics, Mathematics and Statistics

Date Written: February 2014

Abstract

Using a dynamic stochastic general equilibrium model with financial frictions, this paper evaluates the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of monetary policy. It is found that reserve requirements can be used to achieve the Central Bank’s inflation objectives. The use of this instrument, however, produces a real appreciation of the Uruguayan peso. When the Central Bank uses the monetary policy rate as an instrument, the effect of an increase in reserve requirements is to contribute to reducing the negative impact on consumption, investment and output. Nevertheless, the quantitative results in terms of inflation reduction are rather poor. The policy rate becomes more effective in reducing inflation when the reserve requirement instrument is solely directed at achieving financial stability. The paper’s main policy conclusion is that a well-targeted non- conventional policy instrument can help to effectively control inflation.

JEL Classification: C61, C68, E52, E58

Suggested Citation

González Rozada, Martín and Sola, Martín, Towards a 'New' Inflation Targeting Framework: The Case of Uruguay (February 2014). IDB Working Paper No. IDB-WP-486. Available at SSRN: https://ssrn.com/abstract=2400934 or http://dx.doi.org/10.2139/ssrn.2400934

Martín González Rozada (Contact Author)

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
Buenos Aires, C1428BIJ
Argentina
5411 51697318 (Phone)

HOME PAGE: http://www.utdt.edu/profesores/mrozada

Martín Sola

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina
5411 4784 0080 (Phone)
5411 4784 9807 (Fax)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6411 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/sola/

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