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Signaling And Commitment: Monetary Versus Inflation Targeting

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  • GERSBACH, HANS
  • HAHN, VOLKER

Abstract

The article compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and the transparency solution is not feasible because of verifiability problems. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public s expectations about future inflation. We show that inflation targeting is superior to monetary targeting, as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 10 (2006)
Issue (Month): 05 (November)
Pages: 595-624

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Handle: RePEc:cup:macdyn:v:10:y:2006:i:05:p:595-624_05

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Cited by:
  1. Dai, Meixing, 2007. "The design of a ‘two-pillar’ monetary policy strategy," MPRA Paper 14403, University Library of Munich, Germany, revised Mar 2009.
  2. Hans Gersbach & Volker Hahn, 2008. "Forward Guidance for Monetary Policy: Is It Desirable?," CER-ETH Economics working paper series 08/84, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers.
  4. Dai, Meixing, 2009. "On the role of money growth targeting under inflation targeting regime," MPRA Paper 13780, University Library of Munich, Germany.
  5. Hans Gersbach & Volker Hahn, 2011. "Monetary Policy Inclinations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1707-1717, December.

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