Indirect Convertibility, Inflation Targeting, and Monetary Policy Rules

In this paper the proposal for indirect convertibility (henceforth, IC)] put forward by Greenfield and Yeager (1983, 1989) is reexamined and reinterpreted to show that IC can provide a practical monetary policy rule for central banks currently engaged in inflation targeting. One reason for such a reexamination is the renewal of interest in monetary policy rules, as represented by the recent outpouring of econometric work on (implicit) policy rules [Taylor (1993), McCallum (1999), Poole (1999), and Williams (1999)]. Although the policy rules econometric work has not focused specifically on inflation targeting, further econometric work on monetary rules would benefit from a deeper understanding of the theoretical issues involved and the additional dimension that IC can bring to that analysis. In addition, inflation targeting in its own right continues to command much policy support and IC both promotes that and offers a monetary policy rule of its own.