Inflation Targeting, Credibility and Confidence Crises
AbstractWe study the interplay between the central bank transparency, its credibility, and the inflation target level. Based on a model developed in the spirit of the global games literature, we argue that whenever a weak central bank adopts a high degree of transparency and a low target level, a bad and self confirmed type of equilibrium may arise. In this case, an over-the-target inflation becomes more likely. The central bank is considered weak when favorable state of nature is required for the target to be achieved. On the other hand, if a weak central bank opts for less ambitious goals, namely lower degree of transparency and higher target level, it may avoid confidence crises and ensure a unique equilibrium for the expected inflation. Moreover, even after ruling out the possibility of confidence crises, less ambitious goals may be desirable in order to attain higher credibility and hence a better coordination of expectations. Conversely, a low target level and a high central bank transparency are desirable whenever the economy has strong fundamentals and the target can be fulfilled in many states of nature.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 653.
Date of creation: 01 Sep 2007
Date of revision:
Contact details of provider:
Postal: Praia de Botafogo 190, sala 1100, Rio de Janeiro/RJ - CEP: 22253-900
Web page: http://epge.fgv.br
More information through EDIRC
Other versions of this item:
- Rafael Santos & Aloisio Araujo, 2007. "Inflation Targeting, Credibility and Confidence Crises," Working Papers Series, Central Bank of Brazil, Research Department 140, Central Bank of Brazil, Research Department.
- NEP-ALL-2007-10-06 (All new papers)
- NEP-CBA-2007-10-06 (Central Banking)
- NEP-MAC-2007-10-06 (Macroeconomics)
- NEP-MON-2007-10-06 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series, Central Bank of Brazil, Research Department 143, Central Bank of Brazil, Research Department.
- Ricardo Schechtman, 2007. "Joint Validation of Credit Rating PDs under Default Correlation," Working Papers Series, Central Bank of Brazil, Research Department 149, Central Bank of Brazil, Research Department.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Núcleo de Computação da EPGE).
If references are entirely missing, you can add them using this form.