The equilibrium real exchange rate is determined by a sustainable balancing of the current and capital accounts of the balance of payments, in an intertemporal optimizing model. A real wage target gives a real exchange rate target, which will be more appreciated than the real equilibrium...

Effective inflation targeting requires careful selection of inflation target. It is necessary to leave out noisy elements, which the monetary policy cannot control. However, this exclusion should not be done in an ad hoc basis. Rather, core inflation should be determined from the structure of...