Inflation Targeting Policy Under Fixed and Floating Exchange Rate: Analysis Through the Simulation of a Semi-Structural Model for Morocco

Abstract

Morocco has shown its intention to adopt the inflation targeting policy. The latter requires the meeting of a set of preconditions for its implementation as the independence of the central bank, transparency and flexibility of the rate of change. In the literature, considerable importance has been given to the prerequisite of floating change for the success of this new monetary regime. The objective of this paper is to define the most advantageous exchange rate regime for Morocco as part of its vision to adopt the inflation targeting policy. Indeed, it focuses on the analysis of the responses of impulse functions to supply, demand, monetary policy and exchange rate shocks under fixed regime at first and under floating exchange rate regime at second. To do so, a semi-structural model called the "Quarterly Projection Macroeconomic Model" (QPM) of a small open economy will be applied to the case of Morocco, providing an adaptable framework and enabling a comprehensive examination of various potential scenarios. Consequently, the flexible framework of this model allows switching between the fixed and floating regime within in the context of the inflation targeting policy and facilitates the extraction of meaningful comparisons by evaluating the macroeconomic implications inherent to each of these scenarios. The main purpose is to determine which exchange rate regime would be best suited to the Moroccan context. The observation resulting from this analytical work argues that the readjustment of the economy takes place more quickly under the floating exchange rate regime. Also, the return of inflation to equilibrium occurs more quickly in the case of a floating exchange rate regime.

Key words : QPM, fixed exchange rate regime, floating exchange rate regime, impulse functions, macroeconomic implications.

Classification JEL : E52

Paper type : Empirical Research