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Aiming for the Bull's Eye: Inflation Targeting under Uncertainty

  • M. Demertzis
  • N. Viegi

We study inflation targeting under uncertainty. Although uncertainty in the values of structural parameters makes the policy maker naturally more cautious, it does not immediately lead to the optimal monetary policy rule. We examine thus whether there exists a policy rule that improves welfare and discover that having a state contingent inflation target is more likely to improve the performance of the system. This occurs because the instrument is not constrained by the degree of uncertainty of the system which outweighs the losses from an increase in discretion in monetary policy.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 671.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:671
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  1. Ellison, Martin & Valla, Natacha, 2000. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Working Paper Series 0028, European Central Bank.
  2. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  3. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  4. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  5. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-97, May.
  6. Glenn D. Rudebusch & Carl E. Walsh, 1998. "U.S. inflation targeting: pro and con," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may29.
  7. Lewis, Karen K, 1991. "Why Doesn't Society Minimize Central Bank Secrecy?," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 403-15, July.
  8. Geraats, P.M., 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Papers 41, Quebec a Montreal - Recherche en gestion.
  9. Hughes Hallett, Andrew J, 1989. "Econometrics and the Theory of Economic Policy: The Tinbergen-Theil Contributions 40 Years On," Oxford Economic Papers, Oxford University Press, vol. 41(1), pages 189-214, January.
  10. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
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