Abstract:

Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data about four advanced open-economy countries explicitly carrying out an inflation targeting regime, this paper makes a positive examination of whether a real exchange rate disequilibrium systematically affects operations of monetary policy.Although there are some significant differences among those countries, the estimates indicate that exchange rates are generally not crucial to systematic monetary responses in inflation targeting and open economies.However, the exchange rate, as an information variable, is found to be valuable in the monetary policy-making process.

Key words: flexible inflation targeting, exchange rate, monetary policy rule