Inflation Targeting, Sudden Stops and the Cost of Fear of Floating

Number: 
276
Published: 
Classification JEL: 
E3, E58, F3, F41, F42, F47
Keywords: 
Human capital agglomeration, Social returns, Private returns, Externalities, Uncertainty, Fiscal policy

Sudden stops seem to create the perfect environment for disinflation, especially when central banks defend the exchange rate by increasing interest rates. We propose a variation of the output gap model that incorporates the sudden stop shock. The use of t