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Inflation Targets and the Objective of Full Employement

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  • José De Gregorio

Abstract

This paper shows the equivalence between different approaches to the inflationary objective. Defining a range and the percentage of time expected to be within such range is the same as defining a target for inflation projection in a given horizon. Both forms are similar to defining a target in terms of the expected value and desired variance for inflation. Likewise, it shows that the tolerance to deviations from the inflation target, directly associated to the policy horizon, depends on the costs of inflation deviations from the target, and also on output deviations from full employment. Therefore, setting the target in terms of an inflationary objective does not overlook the importance of unemployment nor of the output gap in monetary policy decisions.

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  • José De Gregorio, 2006. "Inflation Targets and the Objective of Full Employement," Working Papers Central Bank of Chile 364, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:364
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_364.pdf
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    References listed on IDEAS

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    1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    2. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
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