IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Inflation targeting and target instability

  • Robert J. Tetlow

Monetary policy is modeled as governed by a known rule, except for a time-varying target rate of inflation. The variable target is taken as representing either discretionary deviations from the rule, or as the outcome of a policymaking committee that is unable to arrive at a consensus. Stochastic simulations of FRB/US, the Board of Governors' large, rational-expectations model of the U.S. economy, are used to examine the benefits of reducing the variability in the target rate of inflation. We find that putting credible boundaries on target variability introduces an important non-linearity in expectations. This improves policy performance by focusing agents' expectations on policy objectives. But improvements are limited; it does not generally pay to reduce target variability to zero. The non-linearity in expectations can be used to conduct a policy with greater attention to output stabilization than otherwise. The results provide insights as to why inflation-targeting countries use bands and why the bands are narrower than studies suggest they should be. Also, a numerical technique that approximates to arbitrary precision a non-linear process with a linear method is also demonstrated. This greatly speeds the simulations and makes them more robust.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.federalreserve.gov/pubs/feds/2000/200001/200001abs.html
Download Restriction: no

File URL: http://www.federalreserve.gov/pubs/feds/2000/200001/200001pap.pdf
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-01.

as
in new window

Length:
Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedgfe:2000-01
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/

More information through EDIRC

Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
  2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  4. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
  5. Eijffinger, Sylvester C W & Huizinga, Harry, 1999. "Should Monetary Policy be Adjusted Frequently?," CEPR Discussion Papers 2074, C.E.P.R. Discussion Papers.
  6. Riboni, Alessandro & Ruge-Murcia, Francesco, 2008. "The Dynamic (In)efficiency of Monetary Policy by Committee," Economics Papers from University Paris Dauphine 123456789/7716, Paris Dauphine University.
  7. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
  8. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2003. "A Quantitative Exploration of the Opportunistic Approach to Disinflation," CEPR Discussion Papers 4073, C.E.P.R. Discussion Papers.
  9. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
  10. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
  11. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2000-01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.