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Balance of Payments Crises Under Inflation Targeting

Balance of Payments Crises Under Inflation Targeting by Shujing Li
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This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share.
International Monetary Fund; April 2007
26 pages; ISBN 9781452767277
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Title: Balance of Payments Crises Under Inflation Targeting
Author: Shujing Li; Isabel K. Yan; Michael Kumhof