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Inflation Targeting and Q Volatility in Small Open Economies

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Author Info
Paul McNelis
Guay Lim

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Abstract

This paper examines the welfare implications of managing Q with inflation targeting by monetary authorities who have to "learn" the laws of motion for both inflation and the rate of growth of Q. Our results show that the Central Bank can achieve great success in reducing the volatility of GDP growth with basically the same inflation volatility, if it incorporates this additional target into its policy regime. However, the welfare effects are generally lower, in terms of consumption, when the monetary authorithy reacts to Q growth as well as inflation

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 254.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:254

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Related research
Keywords: Tobin's Q; monetary policy; learning;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation

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  1. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation, Yale University. [Downloadable!]
  2. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation, Yale University. [Downloadable!]
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