Inflation Targeting as a Coordination Device
The paper analyses inflation targeting when two independent policy authorities (a central bank and a National Government) have divergent preferences for the optimal policy mix. We demonstrate that the main advantage of inflation targeting, as a policy regime, is that it represents a simple proxy for full coordination between policy authorities. Inflation targeting therefore helps because it reduces the conflicts between fiscal and monetary policy, expecially where there are strong â€œspilloversâ€ between the two policies. These results are then tested, and largely validated, in a simulation framework using a small open economy calibrated model. Copyright Kluwer Academic Publishers 2002
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