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Inflation Targeting: A Framework for Communication

Author

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  • Demertzis Maria

    (De Nederlandsche Bank and University of Amsterdam)

  • Viegi Nicola

    (University of Pretoria and ERSA)

Abstract

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents' expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.

Suggested Citation

  • Demertzis Maria & Viegi Nicola, 2009. "Inflation Targeting: A Framework for Communication," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, December.
  • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:44
    DOI: 10.2202/1935-1690.1992
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    Cited by:

    1. Isabelle SALLE & Marc-Alexandre SENEGAS & Murat YILDIZOGLU, 2013. "How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment," Cahiers du GREThA (2007-2019) 2013-24, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    2. van der Cruijsen, Carin & Demertzis, Maria, 2011. "How anchored are inflation expectations in EMU countries?," Economic Modelling, Elsevier, vol. 28(1), pages 281-298.
    3. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2008. "A Measure for Credibility: Tracking US Monetary Developments," Economics Working Papers ECO2008/38, European University Institute.
    4. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, vol. 34(C), pages 114-128.
    5. Andersson, Fredrik N. G. & Jonung, Lars, 2017. "How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden," Working Papers 2017:2, Lund University, Department of Economics.
    6. Yigit, Taner M., 2010. "Inflation targeting: An indirect approach to assess the direct impact," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1357-1368, November.
    7. Yakov Ben-Haim & Maria Demertzis, 2008. "Confidence in Monetary Policy," DNB Working Papers 192, Netherlands Central Bank, Research Department.
    8. Cheick Kader M'baye, 2012. "Inflation Targeting under Heterogeneous Information and Sticky Prices," Working Papers 1202, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. Nautz, Dieter & Pagenhardt, Laura & Strohsal, Till, 2017. "The (de-)anchoring of inflation expectations: New evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 103-115.
    10. Freddy H. CASTRO, 2012. "Señales de política monetaria y movimientos en la estructura a plazo de la tasa de interés en Colombia," Archivos de Economía 009908, Departamento Nacional de Planeación.
    11. Camille Cornand & Cheick Kader M’baye, 2018. "Band or point inflation targeting? An experimental approach," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 283-309, July.
    12. Ehrmann, Michael, 2021. "Point targets, tolerance bands, or target ranges? Inflation target types and the anchoring of inflation expectations," Working Paper Series 2562, European Central Bank.
    13. Isabelle Salle & Marc-Alexandre Sénégas & Murat Yıldızoğlu, 2019. "How transparent about its inflation target should a central bank be?," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 391-427, March.
    14. Salle, Isabelle L., 2015. "Modeling expectations in agent-based models — An application to central bank's communication and monetary policy," Economic Modelling, Elsevier, vol. 46(C), pages 130-141.
    15. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, vol. 28(2), pages 446-455.
    16. Mayes, David G. & Paloviita, Maritta & Virén, Matti, 2016. "EMU and the Anchoring of Inflation Expectations," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 69(4), pages 341-364.
    17. Cheick Kader M'Baye, 2012. "Inflation Targeting under Heterogeneous Information and Sticky Prices," Working Papers halshs-00677671, HAL.
    18. Rangan Gupta & Josine Uwilingiye, 2010. "Dynamic Time Inconsistency And The South African Reserve Bank," South African Journal of Economics, Economic Society of South Africa, vol. 78(1), pages 76-88, March.
    19. Francesco Corsello & Stefano Neri & Alex Tagliabracci, 2019. "Anchored or de-anchored? That is the question," Questioni di Economia e Finanza (Occasional Papers) 516, Bank of Italy, Economic Research and International Relations Area.
    20. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2009. "Anchors for Inflation Expectations," DNB Working Papers 229, Netherlands Central Bank, Research Department.
    21. Carola Binder & Wesley Janson & Randal Verbrugge, 2019. "Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations?," Working Papers 201915, Federal Reserve Bank of Cleveland.
    22. Gabriele Galati & John Lewis & Steven Poelhekke & Chen Zhou, 2011. "Have market views on the sustainability of fiscal burdens influenced monetary authorities' credibility?," DNB Working Papers 304, Netherlands Central Bank, Research Department.
    23. Luba Petersen, 2014. "Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments," Discussion Papers dp14-05, Department of Economics, Simon Fraser University.

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    More about this item

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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