A dual-target monetary policy rule for open economies: an application to France

Abstract

This article proposes a dual targets monetary policy rule for small open economies. In addition to a domestic monetary target, this rule targets the nominal exchange rate at a fixed level. The policy rule is derived from a dynamic programming problem and evaluated in the context of an open-economy model. Using French quarterly data from April 1977 to March 1998, counterfactual simulations show that the dual targets rule performs better than both the historical discretionary policy and the single money-targeting rule in reducing the inflation rates.