Michael Kumhof, Shujing Li, Isabel Yan -- Balance of Payments Crises Under Inflation Targeting

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Abstract

July 2000 (Revised)

The paper analyzes an open economy where fiscal deficits are incompatible with an inflation target, ultimately leading to a speculative attack. There are two differences to the exchange rate targeting case: (i) The attack takes place over a short period of time as opposed to instantaneously. (ii) Reserve losses attributable to the attack are smaller, and increasing in the share of tradable goods in total consumption.