This paper provides an analytical explanation to the empirical association between monetary policy conducted according to the inflation targeting (IT) framework and the appreciation of the exchange rate, relating it to the literature on the effects of the exchange rate on growth. A two sector small open economy model is developed in which the behavior of the non tradable inflation and the nominal exchange rate are analyzed. The results indicate that the response to inflation variance under the IT regime causes the appreciation trend. Since this trend is not reversed immediately, increasing returns in the tradable sector affect capital accumulation.
Monroy Gómez Franco, Luis
"Inflation Targeting and Growth: The Role of the Tradable Sector,"
Undergraduate Economic Review:
1, Article 13.
Available at: http://digitalcommons.iwu.edu/uer/vol9/iss1/13