Rules versus discretion on the choice between exchange-rate-targeting and monetary-aggregate-targeting

This paper compares the performance of inflation and welfare loss between exchange-rate-targeting and monetary-aggregate-targeting regimes for a small-open economy characterized by a rational expectations model of the Phillips curve. We also consider rules-versus-discretion in policy. We obtain three interesting results. First, both regimes result in the same target rate of inflation and the smallest long-run welfare loss, if an active contingent rule is credibly followed. Second, when discretion is undertaken, an exchange-rate-targeting policy is always superior to a monetary-aggregate-targeting one. Third, for a simple fixed rule, Friedman-type's monetary-aggregate-targeting policy works better than exchange-rate-targeting only under specific circumstances.