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Inflation Targeting, Announcements, and Imperfect Credibility

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  • Diana N. Weymark

    ()
    (Department of Economics, Vanderbilt University)

Abstract

In virtually all theoretical studies of inflation targeting, the announced inflation target is treated as being fully credible. However, inflation targeting policies have typically been implemented after protracted periods of poor inflation performance when the policy authority's credibility is quite low. Because credibility imperfections may have a significant impact on inflation expectations and therefore on the monetary transmission mechanism, policies that are optimal under full credibility may not yield the best outcomes under imperfect credibility. In this article I use a simple dynamic model to study the implications that credibility imperfections have for the formulation of optimal inflation targeting policies.

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File URL: http://www.accessecon.com/pubs/VUECON/vu01-w24R.pdf
File Function: Revised version, 2002
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0124.

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Date of creation: Oct 2001
Date of revision: Apr 2002
Handle: RePEc:van:wpaper:0124

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Inflation targeting; credibility; announcements; inflation bias;

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References

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  1. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  2. Soderlind, P & Svensson, L-E-O, 1996. "New Techniques to Extract Market Expectations from Financial Instruments," Papers 621, Stockholm - International Economic Studies.
  3. 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.
  4. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
  5. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May.
  6. Francisco J. Ruge-Murcia, 2000. "Uncovering financial markets' beliefs about inflation targets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 483-512.
  7. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc.
  8. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  9. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  10. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  11. Chan Huh, 1996. "Some evidence on the efficacy of the UK inflation targeting regime: an out-of-sample forecast approach," International Finance Discussion Papers 565, Board of Governors of the Federal Reserve System (U.S.).
  12. Svensson, L.E.O., 1993. "The Simplest Test of Inflation Target Credibility," Papers 560, Stockholm - International Economic Studies.
  13. Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, vol. 108(451), pages 1795-1809, November.
  14. Stanley Fischer, 1986. "Contracts, Credibility, and Disinflation," NBER Working Papers 1339, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ravenna, Federico, 2005. "The European Monetary Union as a commitment device for new EU member states," Working Paper Series 0516, European Central Bank.

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