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Inflation Targeting: A Framework for Communication

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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.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 9 (2009)
Issue (Month): 1 (December)
Pages: 1-32

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Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:44

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Cited by:
  1. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2008. "A Measure for Credibility: Tracking US Monetary Developments," Economics Working Papers ECO2008/38, European University Institute.
  2. R Naraidoo & I Paya, 2010. "Forecasting Monetary Policy Rules in South Africa," Working Papers 611194, Lancaster University Management School, Economics Department.
  3. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2010. "Anchors for Inflation Expectations," Economics Working Papers ECO2010/10, European University Institute.
  4. Luba Petersen, 2014. "Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments," Discussion Papers dp14-05, Department of Economics, Simon Fraser University.
  5. 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.
  6. Yakov Ben-Haim & Maria Demertzis, 2008. "Confidence in Monetary Policy," DNB Working Papers 192, Netherlands Central Bank, Research Department.
  7. 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 2013-24, Groupe de Recherche en Economie Théorique et Appliquée.
  8. Cheick Kader M'baye, 2012. "Inflation Targeting under Heterogeneous Information and Sticky Prices," Working Papers 1202, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  9. Gabriele Galati & John Lewis & Steven Poelhekke & Chen Zhou, 2011. "Have market views on the sustainability of fiscal burdens influenced monetary authorities' credibility?," DNB Working Papers 304, Netherlands Central Bank, Research Department.

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