Advanced Search
MyIDEAS: Login

Inflation targeting: why it works and how to make it work better

Contents:

Author Info

  • William T. Gavin

Abstract

Inflation targeting has worked so well because it leads policymakers to debate, decide on, and communicate the inflation objective. In practice, this process has led the public to believe that the central bank has a long-term inflation objective. Inflation targeting has been successful, then, because the central bank decides on an objective and announces it, not because of a change in its day-to-day behavior in money markets or the way it reacts to news about unemployment or real GDP. By deciding on an inflation rate and announcing it, the central bank is providing information the public needs to concentrate expectations on a common trend. The central bank gains control indirectly by creating information that makes it more likely that people will price things in a way that is consistent with the central bank's goal. The way to improve inflation targeting is to be more explicit about the average inflation rate expected over all relevant horizons. Building a target path for the price level, growing at the desired inflation rate, is the best way to institutionalize a low-inflation environment. In a wide variety of economic models, a price-path target mitigates the zero lower bound problem, eliminates worries about deflation, and improves the central bank's ability to stabilize the real economy.

Download Info

If 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.
File URL: http://research.stlouisfed.org/wp/2003/2003-027.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-027.

as in new window
Length:
Date of creation: 2003
Date of revision:
Publication status: Published in Business Economics, April 2004, 39(2), pp. 30-37
Handle: RePEc:fip:fedlwp:2003-027

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Inflation (Finance) ; Monetary policy;

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  2. Nathan S. Balke & Kenneth M. Emery, 1991. "The algebra of price stability," Research Paper 9117, Federal Reserve Bank of Dallas.
  3. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May.
  4. Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc.
  5. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-66, November.
  6. Bennett McCallum, . "Multiple-Solution Indeterminacies in Monetary Policy Analysis," GSIA Working Papers 2003-E77, Carnegie Mellon University, Tepper School of Business.
  7. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  8. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998. "The Perils of Taylor Rules," Working Papers 98-37, C.V. Starr Center for Applied Economics, New York University.
  9. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
  10. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  11. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets," Working Paper 9818R, Federal Reserve Bank of Cleveland.
  12. Mervyn King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-57.
  13. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
  14. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-63, October.
  15. William T. Gavin, 2003. "FOMC forecast: is all the information in the central tendency?," Review, Federal Reserve Bank of St. Louis, issue May, pages 27-46.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  17. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  18. Stephen G. Cecchetti & Junhan Kim, 2003. "Inflation Targeting, Price-Path Targeting and Output Variability," NBER Working Papers 9672, National Bureau of Economic Research, Inc.
  19. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Chen, Shu-hua & Shaw, Ming-fu & Lai, Ching-chong & Chang, Juin-jen, 2008. "Interest-rate rules and transitional dynamics in an endogenously growing open economy," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 54-75, February.
  2. William Barnett & Evgeniya Duzhak, 2010. "Empirical assessment of bifurcation regions within New Keynesian models," Economic Theory, Springer, vol. 45(1), pages 99-128, October.
  3. Barnett, William A. & Duzhak, Evgeniya, 2006. "Non-Robust Dynamic Inferences from Macroeconometric Models: Bifurcation Stratification of Confidence Regions," MPRA Paper 402, University Library of Munich, Germany.
  4. Anthony Kyereboah-Coleman, 2012. "Inflation targeting and inflation management in Ghana," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(1), pages 25-40, April.
  5. William T. Gavin, 2005. "Recent developments in monetary macroeconomics and U.S. dollar policy," Working Papers 2005-062, Federal Reserve Bank of St. Louis.
  6. Andrés Felipe Giraldo palomino, 2007. "Aversión a la inflación y regla de Taylor en Colombia 1994-2005," DOCUMENTOS DE ECONOMÍA 003947, UNIVERSIDAD JAVERIANA - BOGOTÁ.
  7. Sujit Kapadia, 2005. "Inflation-Target Expectations and Optimal Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2005 81, Money Macro and Finance Research Group.
  8. Sujit Kapadia, 2005. "Inflation-Target Expectations and Optimal Monetary Policy," Economics Series Working Papers 227, University of Oxford, Department of Economics.
  9. William Whitesell, 2005. "An inflation goal with multiple reference measures," Finance and Economics Discussion Series 2005-62, Board of Governors of the Federal Reserve System (U.S.).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2003-027. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.