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

Drifting inflation targets and stagflation

  • Edward S. Knotek II
  • Shujaat Khan

The 1970s provided the United States its first experience with the phenomenon of stagflation—simultaneously high inflation and poor economic performance in terms of unemployment and GDP. Economists continue to debate the root causes of stagflation. The conventional view is that sharp increases in the price of oil during the decade were to blame: large increases in oil prices raise inflation, which saps purchasing power from consumers and businesses and thus hurts economic activity. But a number of economists also point to a role for monetary policy in generating stagflation, in particular through “go-stop” monetary policy: because inflation tends to move slowly, a period of accommodative monetary policy followed by a sharp tightening of policy can result in stagflation, as output turns down quickly but inflation remains high from the “go” phase. ; This paper examines the ability of monetary policy to generate stagflation. Using a relatively standard macroeconomic model, it shows that stagflation arises regularly in cases where the monetary authority allows its inflation target to move around. If households and firms face great uncertainty about the monetary authority’s inflation target, this scenario is also conducive to the emergence of stagflation—even if the inflation target actually remains unchanged. Thus, the paper finds that limiting monetary policy uncertainty and drift in the inflation target during normal times through clearly communicated, credible, and fixed inflation targets would essentially eliminate the possibility of stagflation from monetary factors.

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.kansascityfed.org/publicat/reswkpap/pdf/rwp12-10.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 12-10.

as
in new window

Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:fip:fedkrw:rwp12-10
Contact details of provider: Postal: 1 Memorial Drive, Kansas City, MO 64198-0001
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org/
More information through EDIRC

Order Information: Email:


No references listed on IDEAS
You can help add them by filling out this form.

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:fedkrw:rwp12-10. 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: (Lu Dayrit)

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.