TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Krishnamurthy,Arvind
TI  - Inflation Targeting and Sudden Stops
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9599
PY  - 2003
Y2  - April 2003
UR  - http://www.nber.org/papers/w9599
L1  - http://www.nber.org/papers/w9599.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Arvind Krishnamurthy
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-2671
Fax: 847/491-5719
E-Mail: a-krishnamurthy@northwestern.edu
M1  - published as Ricardo J. Caballero, Arvind Krishnamurthy. "Inflation Targeting and Sudden Stops," in Ben S. Bernanke and Michael Woodford, editors, "The Inflation-Targeting Debate" University of Chicago Press (2005)

AB  - Emerging economies experience sudden stops in capital inflows. As we have argued in Caballero and Krishnamurthy (2002), having access to monetary policy during these sudden stops is useful, but mostly for  insurance' rather than for aggregate demand reasons.  In this environment, a central bank that cannot commit to monetary policy choices will ignore the insurance aspect and follow a procyclical rather than the optimal countercyclical monetary policy.  The central bank will also intervene excessively to support the exchange rate.  These inefficiencies are exacerbated by the presence of an expansionary bias.  In order to solve these problems, we propose modifying the central bank's objective to (i) include state-contingent inflation targets, (ii) target a measure of inflation that overweights non-tradable inflation
ER  -