Lecturer: Kenneth Kuttner (bio)

Questions for Discussion

• What are the essential elements of inflation targeting policy frameworks? How do those differ from frameworks based on exchange rate pegs? What about those central banks (like the Fed) that don’t fall into either of these two categories?
  
  
• Are there significant differences in specific elements of the policy framework among inflation targeters? Among exchange rate peggers?
  
  
• For what sorts of countries does an exchange rate-based framework make the most sense?
  
  
• What are the costs associated with exchange rate volatility—why do countries fear floating?
  
  
• As a practical matter, how should countries wishing to pursue an exchange rate-based determine the “right” level at which to peg?
  
  
• What are the advantages of moving from a “hard” peg to an intermediate exchange rate regime, like a crawling or basket peg, or Williamson’s “basket band and crawl” regime? What are the disadvantages?
  
  
• What are the “prerequisites” for adopting inflation targeting, and how do they compare with those for an exchange rate-based framework?
  
  
• What is the nature of the “credibility versus flexibility” tradeoff inherent in setting an inflation target? Is there an analogous tradeoff in designing an exchange rate peg?
  
  
• To what extent does inflation targeting allow central banks to balance the (sometimes) conflicting objectives of output and inflation stabilization? Is there comparable scope for balancing the two objectives under an exchange rate peg?
  
  
• Why do inflation-targeting frameworks emphasize communication and “transparency”? To what extent is this also an issue for exchange rate-based frameworks?
  
  
• Is exchange rate management of any sort compatible with inflation targeting? Why purpose would exchange rate management serve in the context of inflation targeting?
  
  
• What conditions need to be in place before a country abandons, or relaxes, an exchange rate peg?
  
  
• What considerations should be kept in mind when formulating an “exit strategy” for discontinuing a peg? What factors can make such exits become disorderly?
  

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