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Inflation Targeting and Output Stabilisation

Author

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  • Guy Debelle

    (Reserve Bank of Australia)

Abstract

Inflation targeting has been criticised for being ‘inflation only’ targeting and hence, for ignoring output and employment. This paper argues that this criticism is misplaced. The inflation-targeting framework has sufficient flexibility to allow for the short-run trade-off between output and inflation. The extent to which it does so in part reflects some design features of the inflation-targeting framework, such as targeting bands and the policy horizon, that have been adopted in practice in the inflation-targeting countries. Medium-term price stability can be maintained while still allowing some degree of short-run inflation variability, thus providing scope for lower output variability.

Suggested Citation

  • Guy Debelle, 1999. "Inflation Targeting and Output Stabilisation," RBA Research Discussion Papers rdp1999-08, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp1999-08
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    File URL: http://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-08.pdf
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters,in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    3. Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, vol. 108(451), pages 1795-1809, November.
    4. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    5. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
    6. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    7. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    8. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
    9. Laurence Ball, 1993. "The Dynamics of High Inflation," NBER Working Papers 4578, National Bureau of Economic Research, Inc.
    10. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-1368, December.
    11. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
    12. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
    13. Nargis Bharucha & Christopher Kent, 1998. "Inflation Targeting in a Small Open Economy," RBA Research Discussion Papers rdp9807, Reserve Bank of Australia.
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    Citations

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    Cited by:

    1. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 16(1), pages 157-173, May.
    2. repec:eee:jpolmo:v:39:y:2017:i:2:p:349-370 is not listed on IDEAS
    3. Guglielmo Maria Caporale & Abdurrahman Nazif Catik & Mohamad Husam Helmi & Faek Menla Ali & Coskun Akdeniz, 2016. "Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule?," Discussion Papers of DIW Berlin 1588, DIW Berlin, German Institute for Economic Research.
    4. Lars E. O. Svensson, 2002. "Monetary policy and real stabilization," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 261-312.
    5. David Shepherd & Robert Dixon, 2008. "The Cyclical Dynamics and Volatility of Australian Output and Employment," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 34-49, March.
    6. Ferya Kadioglu & Nilufer Ozdemir & Gokhan Yilmaz, 2000. "Inflation Targeting in Developing Countries," Discussion Papers 0006, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    7. T.C.Y. Kam & G.C. Lim, 2001. "Interest Rate Smoothing and Inflation-Output Variabilityin a Small Open Economy," Department of Economics - Working Papers Series 817, The University of Melbourne.
    8. Daniel M. Rees & Penelope Smith & Jamie Hall, 2016. "A Multi-sector Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 374-408, September.
    9. Guy Debelle, 2001. "The Case for Inflation Targeting in East Asian Countries," RBA Annual Conference Volume,in: David Gruen & John Simon (ed.), Future Directions for Monetary Policies in East Asia Reserve Bank of Australia.
    10. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis—Overview," IMF Working Papers 06/80, International Monetary Fund.
    11. Varshavsky , Leonid, 2009. "Modeling Dynamics of Oil Prices under Different Regimes of Oil Market Development," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 13(1), pages 70-88.
    12. Marjan Petreski, 2011. "A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 57-75.
    13. Javier Hernandez & Allan Layton, 2002. "The Regional Appropriateness of Monetary Policy: An Application of Taylor’s Rule to Australian States and Territories," School of Economics and Finance Discussion Papers and Working Papers Series 115, School of Economics and Finance, Queensland University of Technology.

    More about this item

    Keywords

    Inflation targeting; output stabilisation;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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