Economic growth under alternative monetary regimes: inflation targeting vs real exchange rate targeting

Abstract

The main features and implications of a monetary regime based on inflation targeting are examined and compared to a system based on real exchange rate targeting. The latter is very effective in stimulating economic growth, but the ‘trilemma’ reduces the effectiveness of stabilization based on open market operations. Inflation targeting is very effective in stabilizing prices but it hurts growth and employment. The dynamics of long‐run equilibrium is also analyzed for both regimes.