Inflation Targeting and the Dynamics of the Transmission Mechanism
AbstractThis paper derives closed-form expressions for optimal monetary policy rules when the central bank can influence inflation directly with a one-period lag as well as a two-period lagged effect via the output gap. It turns out that even a modest one-period inflation effect from monetary policy actions has substantial implications for monetary policy that also seem to be a step towards increased realism. For instance, in models where the central bank only can affect inflation with a two-period lag via the output gap, policy becomes more aggressive and the output gap exhibits a tendency to switch sign frequently. This unrealistic oscillating feature can be avoided by allowing the central bank to influence inflation with a one-period lag. The model also illustrates that the nature of empirical (or reduced-form) Phillips curves may reflect monetary policy and the observation that the Phillips curve in recent years has become flatter can in this model be explained by a more counter-cyclical monetary policy.
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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 141.
Length: 17 pages
Date of creation: 01 Sep 2002
Date of revision: 01 Jul 2004
Inflation targeting; optimal monetary policy; the transmission mechanism;
Find related papers by JEL classification:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-28 (All new papers)
- NEP-CBA-2002-09-28 (Central Banking)
- NEP-MON-2002-09-28 (Monetary Economics)
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