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Inflation Targeting under Heterogeneous Information and Sticky Prices

  • Cheick Kader M'baye

    ()

    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

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    Under what conditions should a central bank adopt an inflation targeting regime ? This is the main question we address in this paper. A large part of the literature puts forward that these regimes should have to be adopted, as they yield higher macroeconomic performances. We analyze the issue of optimal inflation targeting in a new theoretical framework, which conciliates the interaction between the degree of price stickiness, and the degree of strategic complementarities in fi-rms’ price setting. We show that adopting a target for inflation, crucially depends on the sequential but complementary importance of the model’s parameters. In particular, we show that strategic complementarities appear to be the fi-rst driving force. When they are low, the central bank must adopt an inflation targeting regime whatever the importance of other parameters in the model. By contrast, when the degree of strategic complementarities is high, adopting a target for in ation depends on both the degree of price stickiness and the precision of central bank’s information about the fundamentals of the economy. When prices are exible enough, adopting an inflation target is never optimal. However, when prices are strongly sticky, and the central bank holds precise information about the fundamentals, the central bank should adopt an explicit target for inflation.

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    File URL: ftp://ftp.gate.cnrs.fr/RePEc/2012/1202.pdf
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    Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1202.

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    Date of creation: 2012
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    Handle: RePEc:gat:wpaper:1202
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    1. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
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    4. DEMERTZIS Maria & HUGHES HALLETT Andrew, . "Central Bank Transparency in Theory and Practice," EcoMod2003 330700041, EcoMod.
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    7. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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    12. Jonathan G. James & Phillip Lawler, 2011. "Optimal Policy Intervention and the Social Value of Public Information," American Economic Review, American Economic Association, vol. 101(4), pages 1561-74, June.
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    14. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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    16. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    17. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
    18. Petra Geraats, 2009. "Trends in Monetary Policy Transparency," CESifo Working Paper Series 2584, CESifo Group Munich.
    19. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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