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A Model for Full-Fledged Inflation Targeting and Application to Ghana

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Author Info

  • Kevin Clinton
  • Jihad Dagher
  • Ondra Kamenik
  • Douglas Laxton
  • Ali Alichi
  • Marshall Mills

Abstract

A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/25.

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Length: 30
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/25

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Related research

Keywords: Disinflation; Economic models; External shocks; Inflation rates; Inflation targeting; Low-income developing countries; inflation; monetary policy; central bank; low inflation; inflation rate; inflation target; increase in inflation; real interest rate; expectations of inflation; monetary fund; national bank; inflation objective; foreign exchange; high inflation; annual inflation; aggregate demand; rate of inflation; real interest rates; monetary economics; price level; actual inflation; monetary authorities; optimal monetary policy; inflationary consequences; inflation process; inflation forecasts; monetary policy transparency; variable inflation; lower inflation; effects of inflation; monetary policy instrument; monetary instrument; inflation dynamics; inflationary pressures; percent inflation; increase in interest rates; monetary policy decision; inflationary spiral; tight monetary policy;

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Cited by:
  1. Michal Andrle & Andrew Berg & Enrico Berkes & Rafael A Portillo & Jan Vlcek & R. Armando Morales, 2013. "Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya," IMF Working Papers 13/239, International Monetary Fund.

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