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Inflation Targeting and the Full Employment Objective

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  • José De Gregorio R.

Abstract

This paper shows the equivalence between various ways of stating the inflation objective. Defining a target range and the percentage of the time it is hoped to fall within its borders is tantamount to defining a target for projected inflation over a given horizon. Both versions are similar to defining the goal in terms of expected value and the desired variance for the inflationary trend. The paper also shows that the tolerance to inflation deviations from the target—directly associated to the policy horizon—depends on the costs of inflation deviating from the target as well as on the deviations of output from its full-employment potential. Therefore, stating the target as a function of an inflation objective does not overlook the importance of unemployment or the output gap in monetary policy decisions.

Suggested Citation

  • José De Gregorio R., 2006. "Inflation Targeting and the Full Employment Objective," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(2), pages 5-13, August.
  • Handle: RePEc:chb:bcchec:v:9:y:2006:i:2:p:5-13
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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