IDEAS home Printed from https://ideas.repec.org/p/fip/fedkrw/rwp12-10.html
   My bibliography  Save this paper

Drifting inflation targets and stagflation

Author

Listed:
  • Edward S. Knotek
  • Shujaat Khan

Abstract

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.

Suggested Citation

  • Edward S. Knotek & Shujaat Khan, 2012. "Drifting inflation targets and stagflation," Research Working Paper RWP 12-10, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp12-10
    as

    Download full text from publisher

    File URL: http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp12-10.pdf
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/frbkcus.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.