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Policy Conflicts and Inflation Targeting: The Role of Credit Markets

Author

Listed:
  • Woon Gyu Choi
  • David Cook

Abstract

This paper shows that stabilizing volatility in credit growth often conflicts with price stability: unusual credit expansions often occur when inflation is low relative to goals, and credit slumps often appear when inflation is overshooting. We find that central banks with inflation targeting (IT) are responsive to credit conditions in both advanced economies and emerging-market economies (EMEs). However, EMEs are more sensitive to inflation conditions, responding to credit growth only when consistent with IT. Macroprudential measures are also deployed to address credit growth volatility when orthodox policy moves would be inconsistent with IT, complementing monetary policy.

Suggested Citation

  • Woon Gyu Choi & David Cook, 2018. "Policy Conflicts and Inflation Targeting: The Role of Credit Markets," IMF Working Papers 18/72, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:18/72
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    Cited by:

    1. Grégory Levieuge & Yannick Lucotte & Florian Pradines-Jobet, 2019. "The Cost of Banking Crises: Does the Policy Framework Matter?," Working papers 712, Banque de France.

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