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Optimal monetary policy and the role of hybrid inflation-price-level targets

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Author Info
Teruyoshi Kobayashi

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Abstract

This study investigates the role of hybrid inflation-price-level targets as a solution to the well-known stabilization bias problem that arises under discretionary policies. The analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank's target variables in addition to the output gap growth target. The reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way. In particular, the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 18 (October)
Pages: 2119-2125
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Handle: RePEc:taf:applec:v:37:y:2005:i:18:p:2119-2125

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  1. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September. [Downloadable!]
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  2. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-45, August. [Downloadable!] (restricted)
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  3. Nicoletta Batini & Anthony Yates, . "Hybrid inflation and price level targeting," Bank of England working papers 135, Bank of England. [Downloadable!]
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  4. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-95, August.
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  5. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56. [Downloadable!]
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  6. Bennett T. McCallum & Edward Nelson, 2000. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October. [Downloadable!] (restricted)
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  8. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July. [Downloadable!] (restricted)
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  9. Teruyoshi Kobayashi, 2004. "Hybrid Inflation-Price-Level Targeting in an Economy With Output Persistence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(5), pages 641-653, November. [Downloadable!] (restricted)
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