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
DO  - 10.3386/w9599
UR  - http://www.nber.org/papers/w9599
L1  - http://www.nber.org/papers/w9599.pdf
N1  - Author contact info:
Ricardo J. Caballero
Department of Economics, E52-528
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Arvind Krishnamurthy
Stanford Graduate School of Business
Stanford University
655 Knight Way
Stanford, CA 94305
E-Mail: akris@stanford.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  -