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Inflation Targeting: a Framework for Communication

Author

Listed:
  • Maria Demertzis
  • Nicola Viegi

Abstract

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents' expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Maria Demertzis & Nicola Viegi, 2007. "Inflation Targeting: a Framework for Communication," ERSA Working Paper Series 071, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:071
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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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