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Inflation Targeting under Heterogeneous Information and Sticky Prices

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  • Cheick Kader M'baye

    ()
    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

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    Abstract

    Under what conditions should a central bank adopt an inflation targeting regime ? This is the main question we address in this paper. A large part of the literature puts forward that these regimes should have to be adopted, as they yield higher macroeconomic performances. We analyze the issue of optimal inflation targeting in a new theoretical framework, which conciliates the interaction between the degree of price stickiness, and the degree of strategic complementarities in fi-rms’ price setting. We show that adopting a target for inflation, crucially depends on the sequential but complementary importance of the model’s parameters. In particular, we show that strategic complementarities appear to be the fi-rst driving force. When they are low, the central bank must adopt an inflation targeting regime whatever the importance of other parameters in the model. By contrast, when the degree of strategic complementarities is high, adopting a target for in ation depends on both the degree of price stickiness and the precision of central bank’s information about the fundamentals of the economy. When prices are exible enough, adopting an inflation target is never optimal. However, when prices are strongly sticky, and the central bank holds precise information about the fundamentals, the central bank should adopt an explicit target for inflation.

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    Bibliographic Info

    Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1202.

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    Date of creation: 2012
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    Handle: RePEc:gat:wpaper:1202

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    Keywords: Inflation targeting; price stickiness; heterogeneous information; strategic complementarities;

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    1. Demertzis Maria & Viegi Nicola, 2009. "Inflation Targeting: A Framework for Communication," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, December.
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    13. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
    14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    15. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    16. Mauro Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 10/91, International Monetary Fund.
    17. Jonathan G. James & Phillip Lawler, 2011. "Optimal Policy Intervention and the Social Value of Public Information," American Economic Review, American Economic Association, vol. 101(4), pages 1561-74, June.
    18. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
    19. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
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