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Inflation Target Instability and Interest Rates

  • Mellin, Stefan

    (Dept. of Economics, Stockholm University)

Registered author(s):

    The implementation of explicit quantitative inflation targets elucidates the assessment of credibility of future monetary policy. Here the explicit inflation target is time-varying and stochastic with asymmetric information. It is shown that central bank independence promotes lower inflation but not at the cost of increased output variability. Marked political instability and instrument dependence are detrimental to credibility, and impede monetary policy with unchanged long term nominal interest rates. The marginal effect from less independence on interest rate volatility is increasing in political instability. Strategic delegation of an optimal inflation target with a monetary reform eliminates the inflation bias. Empirical evidence substantiates the predictions when confronted with cross-country OECD data.

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    File URL: http://www2.ne.su.se/paper/wp97_04.pdf
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    Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 1997:4.

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    Length: 31 pages
    Date of creation: 02 Jun 1998
    Date of revision:
    Handle: RePEc:hhs:sunrpe:1997_0004
    Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
    Phone: +46 8 16 20 00
    Fax: +46 8 16 14 25
    Web page: http://www.ne.su.se/
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    7. Svensson, Lars E.O., 1997. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," Seminar Papers 614, Stockholm University, Institute for International Economic Studies.
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    17. Cukierman, A. & Webb, S., 1994. "Political Influence on the Central Bank : International Evidence," Discussion Paper 1994-100, Tilburg University, Center for Economic Research.
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