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Optimal monetary policy and the role of hybrid inflation-price-level targets

  • Teruyoshi Kobayashi

This study investigates the role of hybrid inflation-price-level targets as a solution to the well-known stabilization bias problem that arises under discretionary policies. The analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank's target variables in addition to the output gap growth target. The reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way. In particular, the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 18 ()
Pages: 2119-2125

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Handle: RePEc:taf:applec:v:37:y:2005:i:18:p:2119-2125
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  1. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56.
  2. Batini, Nicoletta & Yates, Anthony, 2003. " Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
  3. Henrik Jensen & Roel M. W. J. Beetsma, 1999. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts: Comment," American Economic Review, American Economic Association, vol. 89(1), pages 342-347, March.
  4. Lockwood, B. & Miller, M. & Zhang, L., 1994. "Designing Monetary Policy when Unemployment Persists," Discussion Papers 9408, Exeter University, Department of Economics.
  5. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
  6. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
  7. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
  8. Svensson, Lars E O, 1996. "Price-level Targeting versus Inflation Targeting: A Free Lunch?," CEPR Discussion Papers 1510, C.E.P.R. Discussion Papers.
  9. Christian Jensen & Bennett C. McCallum, 2002. "The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment," NBER Working Papers 8882, National Bureau of Economic Research, Inc.
  10. Teruyoshi Kobayashi, 2004. "Hybrid Inflation-Price-Level Targeting in an Economy With Output Persistence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(5), pages 641-653, November.
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