RBNZ paper on exchange rate stabilisation

The Reserve Bank of New Zealand Working Paper "How costly is exchange rate stabilisation for an inflation targeter? The case of Australia" quantifies the costs of mitigating exchange rate volatility within the context of a flexible inflation targeting central bank.

Within a standard linear quadratic formulation of inflation targeting, we append a term that penalises deviations in the exchange rate to the central bank's loss function. For a simple forward-looking New Keynesian model, we show that

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