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Inflation targeting, the zero lower bound and post-crisis monetary policy

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  • Alexandru Ciungu

    (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne)

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    Abstract

    This paper addresses recent developments in monetary policy theory in the context of a binding Zero Lower Bound and discusses the possible evolution of monetary policy after the Great Recession. We start from Olivier Blanchard's suggestion that a higher inflation target and correspondingly higher interest rates would offer larger wiggle room for Central Banks to stimulate the economy through monetary easing without hitting the ZLB and might thus prove to be a desirable policy. Using a New-Keynesian DSGE framework and including positive steady state inflation, we investigate if having a higher permanent inflation target would improve welfare and find that this is unlikely. Furthermore, we address the possibility of having temporary higher inflation targets and the effect this could have on economic fundamentals. Finally, we discuss whether simple inflation targeting suffices or if monetary policy might evolve in the aftermath of the crisis towards including several objectives and/or instruments, so as to better respond to future economic downturns.

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    File URL: http://dumas.ccsd.cnrs.fr/docs/00/80/17/12/PDF/2012-06_CIUNGU_INF.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number dumas-00801712.

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    Date of creation: Jun 2012
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    Handle: RePEc:hal:journl:dumas-00801712

    Note: View the original document on HAL open archive server: http://dumas.ccsd.cnrs.fr/dumas-00801712
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    Related research

    Keywords: politique monétaire; inflation;

    References

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    1. Peersman, Gert, 2011. "Macroeconomic effects of unconventional monetary policy in the euro area," Working Paper Series 1397, European Central Bank.
    2. Robert Amano & Malik Shukayev, 2010. "Monetary Policy and the Zero Bound on Nominal Interest Rates," Bank of Canada Review, Bank of Canada, vol. 2010(Summer), pages 3-10.
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    8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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    12. Bennett T. McCallum, 2011. "Should central banks raise their inflation targets? Some relevant issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 111-131.
    13. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    14. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
    15. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
    16. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
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