Credibility and the effectiveness of inflation targeting regimes
AbstractThis paper investigates the design of monetary policy in inflation targeting regimes. It is partly motivated by our view that, despite the widespread adoption on inflation targeting regimes in a number of countries including the UK, the policy debate is insufficiently concerned with the central question; how exactly should interest rates be moved to control inflation? We argue that the resulting lack of clarity in official descriptions of the practical operation of monetary policy in the UK may be undermining the credibility and hence the likely effectiveness of the announced regime of inflation targeting. The paper describes a stylised model of the determination of inflation which is used to illustrate some of the technical considerations necessary in the appropriate design of an inflation targeting regime. In particular, it is argued that policy should be defined and announced in terms of a relatively simple feedback rule which relates changes in interest rates to inflation and to other indicators. The advantages of real rather than nominal interest rate rules are demonstrated. Simple output indicator regimes are compared with the fully optimal policy rule. The effect of incomplete credibility where private sector agents need to learn about the true policy regime are illustrated for different rates of learning. By calibrating a stochastic version of the model to UK data, the expected variance in inflation is illustrated for different feedback regimes. The effect of incomplete credibility in a stochastic context is illustrated by showing the effects of assuming that the private sector's perception of the inflation target depends on the track record of the monetary authorities.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 85.
Date of creation:
Date of revision:
Contact details of provider:
Postal: 2 Dean Trench Street Smith Square London SW1P 3HE
Web page: http://niesr.ac.uk
Other versions of this item:
- Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 28-50, Suppl..
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Communications Manager).
If references are entirely missing, you can add them using this form.