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Inflation Targeting: A Framework for Communication

Author

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  • Demertzis Maria

    (De Nederlandsche Bank and University of Amsterdam)

  • Viegi Nicola

    (University of Pretoria and ERSA)

Abstract

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents' expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.

Suggested Citation

  • Demertzis Maria & Viegi Nicola, 2009. "Inflation Targeting: A Framework for Communication," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, December.
    • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:44
    DOI: 10.2202/1935-1690.1992
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    Cited by:

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    3. Isabelle SALLE & Marc-Alexandre SENEGAS & Murat YILDIZOGLU, 2013. "How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment," Cahiers du GREThA (2007-2019) 2013-24, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    4. Freddy H. CASTRO, 2012. "Senales de política monetaria y movimientos en la estructura a plazo de la tasa de interés en Colombia," Archivos de Economía 9908, Departamento Nacional de Planeación.
    5. Camille Cornand & Cheick Kader M’baye, 2018. "Band or point inflation targeting? An experimental approach," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 283-309, July.
    6. Corsello, Francesco & Neri, Stefano & Tagliabracci, Alex, 2021. "Anchored or de-anchored? That is the question," European Journal of Political Economy, Elsevier, vol. 69(C).
    7. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, vol. 28(2), pages 446-455.
    8. Nautz, Dieter & Pagenhardt, Laura & Strohsal, Till, 2017. "The (de-)anchoring of inflation expectations: New evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 103-115.
    9. van der Cruijsen, Carin & Demertzis, Maria, 2011. "How anchored are inflation expectations in EMU countries?," Economic Modelling, Elsevier, vol. 28(1-2), pages 281-298, January.
    10. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2009. "Anchors for Inflation Expectations," DNB Working Papers 229, Netherlands Central Bank, Research Department.
    11. Yigit, Taner M., 2010. "Inflation targeting: An indirect approach to assess the direct impact," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1357-1368, November.
    12. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, vol. 34(C), pages 114-128.
    13. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2008. "A Measure for Credibility: Tracking US Monetary Developments," Economics Working Papers ECO2008/38, European University Institute.
    14. Andersson, Fredrik N. G. & Jonung, Lars, 2017. "How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden," Working Papers 2017:2, Lund University, Department of Economics.
    15. Isabelle Salle & Marc-Alexandre Sénégas & Murat Yıldızoğlu, 2019. "How transparent about its inflation target should a central bank be?," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 391-427, March.
    16. Salle, Isabelle L., 2015. "Modeling expectations in agent-based models — An application to central bank's communication and monetary policy," Economic Modelling, Elsevier, vol. 46(C), pages 130-141.
    17. Mayes, David G. & Paloviita, Maritta & Virén, Matti, 2016. "EMU and the Anchoring of Inflation Expectations," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 69(4), pages 341-364.
    18. Cheick Kader M'Baye, 2012. "Inflation Targeting under Heterogeneous Information and Sticky Prices," Working Papers halshs-00677671, HAL.
    19. Carola Binder & Wesley Janson & Randal J. Verbrugge, 2019. "Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations?," Working Papers 19-15, Federal Reserve Bank of Cleveland.
    20. Luba Petersen, 2014. "Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments," Discussion Papers dp14-05, Department of Economics, Simon Fraser University.

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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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