Empirical evidence shows that inflation-targeting central banks respond to movements in the foreign interest rate (Fed funds rate), in addition to reacting to expected CPI inflation and to the domestic output gap, according to a recent research paper from the Central Bank of Chile.

The paper by Rodrigo Caputo and Luis Oscar Herrera, entitled Efficient CPI-based Taylor rules in small open economies, show that a CPI inflation-based Taylor rule can implement the flexible price (and the efficient)