THE TRIPOD INFLATION TARGETING, PRIMARY SURPLUSES AND EXCHANGE RATE FLUCTUATION: ANALYSIS FOR ALTERNATIVE REGIMES UNDER SUPPLY AND EXCHANGE RATE SHOCKS

Abstract

The combination of inflation targeting, primary surpluses and flexible exchange rates, under exchange rate and supply shocks, can create undesirable effects on the economic dynamics. This paper runs computational experiments through a dynamic and stochastic economic model, which is able to receive alternative constraints. In general, it shows that, under supply and exchange rate shocks, an adequate policy regime includes flexible inflation targeting, anti-cyclical primary surpluses and some kind of short-term capital controls, without eliminating the free exchange rate fluctuation, as a means of minimizing the social losses.