Aiming for the Bull's Eye: Inflation Targeting under Uncertainty

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Aiming for the Bull's Eye: Inflation Targeting under Uncertainty

Author Info

M. Demertzis
N. Viegi

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Abstract

We study the implications of uncertainty for ination targeting. We apply Brainard's static framework which imposes multiplicative uncertainty in the monetary transmission. Brainard's main result is that in the presence of uncertainty, monetary authorities become naturally more cautious. But this also implies that monetary objectives are seldom achieved. We there- fore attempt next to ...nd a monetary rule that reaches the objectives set more often, improving therefore the welfare of the Central Bank. Such a rule is the result of a new algorithm that we put forward, in which the ination target is state contigent. The Central Bank sets (as an auxil- liary step) therefore, a variable ination target that depends optimally, on both the degree of uncertainty as well as on the shocks that occur each time. We show that such a rule helps the CB attain its objectives more often thereby reducing the losses incurred. Moreover, and as a corollary to such an approach, the rule derived is ex ante neutral to the degree of uncertainty.

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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 88.

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Length: 18 pages
Date of creation: 2004
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Handle: RePEc:dnb:staffs:88

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Paper
- M. Demertzis & N. Viegi, 2001. "Aiming for the Bull's Eye: Inflation Targeting under Uncertainty," WO Research Memoranda (discontinued) 671, Netherlands Central Bank, Research Department. [Downloadable!]

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-10-12 (All new papers)
NEP-MAC-2003-10-12 (Macroeconomics)
NEP-MON-2003-10-12 (Monetary Economics)
NEP-RMG-2003-10-12 (Risk Management)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Petra M. Geraats, 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Macroeconomics 0012011, EconWPA. [Downloadable!]
Other versions:
- Petra M. Geraats, 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 41, European Central Bank. [Downloadable!]
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Other versions:
- Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers 636, Stockholm - International Economic Studies.
- Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers 1852, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Other versions:
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Other versions:
- Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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Other versions:
- Natacha Valla & Martin Ellison, 2000. "Learning, uncertainty and Central Bank activism in an economy with strategic interactions," Working Paper Series 28, European Central Bank. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Maria Demertzis & Nicola Viegi, 2004. "Inflation Targets as Focal Points," DNB Working Papers 017, Netherlands Central Bank, Research Department. [Downloadable!]
Other versions:
- Maria Demertzis & Nicola Viegi, 2005. "Inflation Targets as Focal Points," Money Macro and Finance (MMF) Research Group Conference 2005 52, Money Macro and Finance Research Group. [Downloadable!]
- Maria Demertzis & Nicola Viegi, 2008. "Inflation Targets as Focal Points," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 55-87, March. [Downloadable!]
Giuseppe Ciccarone & Giovanni Di Bartolomeo & Enrico Marchetti, 2005. "Supply-Side Fiscal Policy, Conservativeness, And Central Bank Transparency," Working Papers 77, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
Maria Demertzis & Nicola Viegi, 2004. "The Dynamic Properties of Inflation Targeting Under Uncertainty," DNB Staff Reports (discontinued) 113, Netherlands Central Bank. [Downloadable!]

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