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Inflation Targeting: A Framework for Communication

Listed author(s):
  • Demertzis Maria

    ()

    (De Nederlandsche Bank and University of Amsterdam)

  • Viegi Nicola

    ()

    (University of Pretoria and ERSA)

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 9 (2009)
Issue (Month): 1 (December)
Pages: 1-32

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Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:44
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References listed on IDEAS
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  1. Antulio N. Bomfim & Glenn D. Rudebusch, 1997. "Opportunistic and deliberate disinflation under imperfect credibility," Working Papers in Applied Economic Theory 97-07, Federal Reserve Bank of San Francisco.
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