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Inflation Targeting, Price-Path Targeting and Output Variability

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  • Stephen G. Cecchetti
  • Junhan Kim

Abstract

The dramatic improvement in macroeconomic outcomes during the 1990s - stable, low inflation and high, stable growth - can be at least partly ascribed to improved monetary policy. Central banks became more independent and many of them adopted inflation targeting. This paper examines the potential for further improvements by refining the concept of inflation targeting. We construct a general model that encompasses a broad array of possible target regimes, and apply it to the data. Our results suggest that the vast majority of countries could benefit from moving to pricepath targeting, where the central bank makes up for periods of above (below) target inflation with later periods of below (above) target inflation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9672.

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Date of creation: May 2003
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Publication status: published as Inflation Targeting, Price-Path Targeting, and Output Variability , Stephen G. Cecchetti, Kim. in The Inflation-Targeting Debate , Bernanke and Woodford. 2005
Handle: RePEc:nbr:nberwo:9672

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  1. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
  2. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(2), pages 497-520, April.
  3. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 13(2), pages 125-146, August.
  4. Mervyn King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 11-57.
  5. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274 Central Bank of Chile.
  6. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1922, Harvard - Institute of Economic Research.
  7. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
  8. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  9. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
  10. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30.
  11. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 155-183, February.
  12. Batini, Nicoletta & Yates, Anthony, 2003. " Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(3), pages 283-300, June.
  13. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32.
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