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Inflation Targeting and Q Volatility in Small Open Economies

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  • Paul D. McNelis
  • Guay C. Lim

Abstract

This paper examines the welfare implications of managing Q with inflation targeting by monetary authorities who have to "learn" the laws of motion for both inflation and the rate of growth of Q. Our results show that the Central Bank can achieve great success in reducing the volatility of GDP growth with basically the same inflation volatility, if it incorporates this additional target into its policy regime. However, the welfare effects are generally lower, in terms of consumption, when the monetary authorithy reacts to Q growth as well as inflation

Suggested Citation

  • Paul D. McNelis & Guay C. Lim, 2004. "Inflation Targeting and Q Volatility in Small Open Economies," Econometric Society 2004 Far Eastern Meetings 505, Econometric Society.
    • Handle: RePEc:ecm:feam04:505
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    File URL: http://repec.org/esFEAM04/up.13379.1077939969.pdf
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    References listed on IDEAS

    as
    1. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    2. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    3. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation for Research in Economics, Yale University.
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    More about this item

    Keywords

    inflation targets; Tobin's Q; learning; monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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