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Inflation targeting under commitment and discretion

  • Richard Dennis

Inflation targeting has been adopted by many central banks, but not by the U.S. Federal Reserve. Using an estimated New Keynesian business cycle model, I perform counterfactual simulations to consider how history might have unfolded if the Federal Reserve had adopted a form of flexible inflation targeting in the year Paul Volcker was appointed chairman. The first simulation assumes that the Federal Reserve could have tied its hands and committed once and for all; the second assumes that the Federal Reserve would have set policy with discretion. While the broad contours of historical outcomes remain under inflation targeting, there are times over the past 25 years when inflation targeting would have led to materially different outcomes.

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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2005)
Issue (Month): ()
Pages: 1-13

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Handle: RePEc:fip:fedfer:y:2005:p:1-13
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