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Inflation targeting

Author

Listed:
  • Harris Dellas
  • Fabrice Collard

Abstract

We evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the ine±cient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value. With only the imperfect competition friction present (in the †cashless†version of the model), inflation variability is costly independent of the level of capital adjustment costs, the degree of price rigidity, the size of markups, the degree of risk aversion and the type of the shock. A small amount of inflation variability may become desirable when prices are fairly flexible and capital adjustment costs low if the model includes both frictions

Suggested Citation

  • Harris Dellas & Fabrice Collard, 2004. "Inflation targeting," Computing in Economics and Finance 2004 97, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:97
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    References listed on IDEAS

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    Cited by:

    1. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2005. "Price- and wage- inflation targeting: variations on a theme by Erceg, Henderson, and Levin," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 181-215.
    2. Minford, Patrick & Peel, David, 2004. "Calvo Contracts: A Critique," CEPR Discussion Papers 4288, C.E.P.R. Discussion Papers.
    3. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
    4. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2006. "How Do Monetary and Fiscal Policy Interact in the European Monetary Union?," NBER Chapters,in: NBER International Seminar on Macroeconomics 2004, pages 241-326 National Bureau of Economic Research, Inc.
    5. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2004. "The Cost of Nominal Inertia in NNS Models," NBER Working Papers 10889, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    monetary policy; welfare;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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