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Inflation zone targetting

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Author Info
Athanasios Orphanides () (Board of Governors of the Federal Reserve System, Division of Monetary Affairs)
Volker Wieland () (Johann Wolfgang Goethe-Universität)

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Abstract

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zonelinear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies. We calibrate the model based on parameters for the U.S. and the Euro area and employ a numerical dynamic programming algorithm to derive the optimal policies. With this algorithm, we examine the role of uncertainty, model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 8.

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Length: 58 pages
Date of creation: Oct 1999
Date of revision:
Handle: RePEc:ecb:ecbwps:19990008

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Related research
Keywords: inflation; monetary policy; stabilization;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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    Other versions:
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