Incorporating Financial Stability in Inflation Targeting Frameworks

The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.
Publication date: September 2011
ISBN: 9781463904326
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Economics- Macroeconomics , Economics / General , International - Economics , inflation , monetary policy , central bank , monetary shock , price stability , inflation-targeting , foreign exchange , monetary economics , price elasticity , inflation rate , foreign currency , real variables , monetary authority , monetary fund , inflation targeting framework , in

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