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Speed Limit Policies versus Inflation Targeting: A Free Lunch?

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Author Info
Hatcher, Michael C. () (Cardiff Business School)

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Abstract

Inflation targeting is currently popular with central banks. Is this popularity justified? I investigate this question by comparing a speed limit policy and inflation targeting with a Lucas-type Phillips curve capturing output gap persistence. If the output gap is at least moderately persistent, a speed limit policy can: (1) partly eliminate the state-contingent inflation bias, and (2) reduce inflation variability at no output gap variability cost.

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File URL: http://www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2008_20.pdf
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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/20.

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Length: 13 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:cdf:wpaper:2008/20

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Related research
Keywords: inflation targeting; speed limit policy; inflation bias; discretion; stabilisation;

Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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  1. Carl E. Walsh, 2003. "Minding the speed limit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue May 30. [Downloadable!]
  2. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32. [Downloadable!]
  3. D. A. Peel & I. Paya & I. Venetis, 2004. "Estimates of US monetary policy rules with allowance for changes in the output gap," Applied Economics Letters, Taylor and Francis Journals, vol. 11(10), pages 601-605, August. [Downloadable!] (restricted)
  4. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March. [Downloadable!]
    Other versions:
  5. Lars E.O. Svensson, 1997. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Le, Vo Phuong Mai & Gillman, Max & Minford, Patrick, 2007. "An Endogenous Taylor Condition in an Endogenous Growth Monetary Policy Model," Cardiff Economics Working Papers E2007/29, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
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