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Inflation Targeting and Q Volatility in Small Open Economies

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  • Paul McNelis
  • Guay Lim

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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File URL: http://repec.org/sce2004/up.13248.1077938549.pdf
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Bibliographic Info

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

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