Inflation Targeting Lite' in Small Open Economies

This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius''s experience with ''inflation targeting lite'' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its ''inflation targeting lite'' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations.Inflation targeting;Economic models;Exchange rate management;Exchange rate regimes;inflation, monetary policy, inflationary expectations, foreign exchange, central bank, inflation target, monetary fund, actual inflation, price stability, aggregate demand, monetary policy rule, real interest rate, annual inflation, monetary policy operations, inflation rate, monetary policy regime, low inflation, monetary policy objectives, fall in inflation, open market operations, rational expectations, monetary base, inflationary pressures, monetary policy instruments, effective exchange rates, reduction in inflation, monetary policy rules, inflation objective, financial stability, price level, inflation dynamics, inflation targeting regime, interest rate targeting, monetary shocks, lower inflation, lower inflationary expectations, monetary policy reaction function, money market, tight monetary policy, monetary union, government securities, aggregate demand curve, monetary policy framework, reserve requirements, treasury securities, monetary condition, liquidity management