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Macroeconomic models for inflation targeting in economies with financial dollarisation

Vega, Marco (2006) Macroeconomic models for inflation targeting in economies with financial dollarisation. PhD thesis, London School of Economics and Political Science.

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After an introductory chapter, the thesis is divided in three parts. In the first part, chapter 2 includes domestic financial dollarisation into an otherwise standard DSGE model of a small open economy. Domestic financial dollarisation implies that some of the assets of households and some liabilities of financial intermediaries are denominated in a foreign currency. The main implication is that exchange rate swings affect the financial wealth of households and disrupt production. The chapter also derives a New-Keynesian Phillips curve augmented with agency costs. Chapter 3, sets up a framework whereby demand substitution occurs when cheaper imported goods appear and trigger a propagation mechanism in non-tradeable prices. As in the previous chapter, Chapter 3 disentangles the dynamics of inflation exploring yet another effect that explains how the fall in world inflation might drag down non-tradeable inflation in a small open economy. The second part of the thesis deals with operational issues; notably the inflation forecast and instrument setting. Chapter 4 proposes a Bayesian method to combine model-based density forecasts with policy makers’ subjective priors. Next, Chapter 5 estimates forward-looking interest rate rules by quantile regressions. The advantage of quantile regressions is that we can learn about the likely feedback from forecasts to instruments, not only on the mean value but on different quantiles of the inflation forecast distribution. Thus, we can gain some added information about monetary authorities’ risk balance or the nature of their loss function. In the last part of the thesis, Chapter 6 provides an econometric evaluation of the effects of inflation targeting adoption on the dynamics of inflation. This evaluation covers developed and emerging-market inflation targeters alike.

Item Type: Thesis (PhD)
Additional Information: © 2006 Marco Antonio Vega
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Goodhart, Charles

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