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

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  • M. Demertzis
  • N. Viegi

Abstract

We study inflation targeting under uncertainty. Although uncertainty in the values of structural parameters makes the policy maker naturally more cautious, it does not immediately lead to the optimal monetary policy rule. We examine thus whether there exists a policy rule that improves welfare and discover that having a state contingent inflation target is more likely to improve the performance of the system. This occurs because the instrument is not constrained by the degree of uncertainty of the system which outweighs the losses from an increase in discretion in monetary policy.

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File URL: http://www.dnb.nl/binaries/wo0671_tcm46-145972.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 671.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:671

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Keywords: Inflation Targeting; Uncertainty; Variable Target; Credibility;

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References

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  1. Glenn D. Rudebusch & Carl E. Walsh, 1998. "U.S. inflation targeting: pro and con," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may29.
  2. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  3. Ellison, Martin & Valla, Natacha, 2000. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Working Paper Series 0028, European Central Bank.
  4. Jon Faust & Lars E. O. Svensson, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," NBER Working Papers 6452, National Bureau of Economic Research, Inc.
  5. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  6. Geraats, Petra M., 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 0041, European Central Bank.
  7. Lewis, Karen K, 1991. "Why Doesn't Society Minimize Central Bank Secrecy?," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 403-15, July.
  8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  9. Hughes Hallett, Andrew J, 1989. "Econometrics and the Theory of Economic Policy: The Tinbergen-Theil Contributions 40 Years On," Oxford Economic Papers, Oxford University Press, vol. 41(1), pages 189-214, January.
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Cited by:
  1. Maria Demertzis & Nicola Viegi, 2005. "Inflation Targets as Focal Points," Working Papers 02, Economic Research Southern Africa.
  2. Giuseppe Ciccarone & Giovanni Di Bartolomeo & Enrico Marchetti, 2005. "Supply- side Fiscal Policy,Conservativeness, and Central Bank trasparency," Working Papers 77, University of Rome La Sapienza, Department of Public Economics.
  3. Maria Demertzis & Nicola Viegi, 2004. "The Dynamic Properties of Inflation Targeting Under Uncertainty," DNB Staff Reports (discontinued) 113, Netherlands Central Bank.

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