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Inflation Targeting and Output Growth

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  • International Monetary Fund

Abstract

This paper evaluates the performance of two alternative policy rules, a forward-looking rule and a spontaneous adjustment rule, under alternative inflation targets, in terms of output losses in a macroeconomic model, using European Union data. The simulations suggest that forward-looking rules contribute to macroeconomic stability and monetary policy credibility, and that a positive inflation target, as opposed to zero inflation, leads to higher and less volatile output. These results are robust to changes in the specification of the model and time period. The same methodology applied to individual countries supports country-specific flexible inflation targeting.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/89.

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Length: 27
Date of creation: 01 May 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/89

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Keywords: Inflation targeting; European Union; inflation; monetary policy; inflation rate; monetary authorities; inflation target; central bank; monetary economics; low inflation; price stability; inflation-targeting; inflation performance; monetary fund; nominal interest rate; actual inflation; real interest rate; rational expectations; lower inflation; real output; macroeconomic stability; monetary policy rules; optimal monetary policy; high inflation; real money; money supply; real wages; price level; inflation rates; rate of inflation; average inflation; inflation forecasts; monetary policy rule; monetary disturbance; forecasting inflation; percent inflation; monetary policy regimes; effects of inflation; monetary arrangements; discretionary monetary policy; demand for money; low rate of inflation; inflation dynamics; monetary policy regime; average inflation rate;

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References

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Cited by:
  1. Forte, Antonio, 2009. "The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?," MPRA Paper 18309, University Library of Munich, Germany.
  2. Koppány, Krisztián, 2007. "Likviditási csapda és deflációs spirál egy inflációs célt követő modellben - a hitelesség szerepe
    [A liquidity trap and deflationary spiral in a model for pursuing an inflation target -
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 974-1003.
  3. Magda Kandil, 2009. "Public Spending and the Macroeconomy: Evidence from Developing and Developed Countries," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 8(2), pages 133-158, August.
  4. Forte, Antonio, 2009. "The stability of the inflation rate in the Euro area: the role of Globalization and labour market," MPRA Paper 16587, University Library of Munich, Germany.

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