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Inflation Targeting, Announcements, and Imperfect Credibility

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Author Info
Diana N. Weymark () (Department of Economics, Vanderbilt University)

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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.vanderbilt.edu/Econ/wparchive/workpaper/vu01-w24R.pdf
File Format: application/pdf
File Function: Revised version, 2002
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series 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://sitemason.vanderbilt.edu/econ/
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Related research
Keywords: Inflation targeting; credibility; announcements; inflation bias;

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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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. 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.). [Downloadable!]
  3. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October. [Downloadable!] (restricted)
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  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  5. Svensson, L.E.O., 1993. "The Simplest Test of Inflation Target Credibility," Papers 560, Stockholm - International Economic Studies.
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  6. Soderlind, P & Svensson, L-E-O, 1996. "New Techniques to Extract Market Expectations from Financial Instruments," Papers 621, Stockholm - International Economic Studies.
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  7. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May. [Downloadable!] (restricted)
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  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. [Downloadable!]
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  9. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  10. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
  12. 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. [Downloadable!]
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  13. Stanley Fischer, 1986. "Contracts, Credibility, and Disinflation," NBER Working Papers 1339, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Federico Ravenna, 2005. "The European Monetary Union as a Commitment Device for New EU Member States," Working Papers 98, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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