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Inflation Targeting, Learning and Q Volatility in Small Open Economies

Author

Listed:
  • Paul D. McNelis

    (Fordham University)

  • Guay Lim

    (University of Melbourne)

Abstract

This paper examines the welfare implications of managing asset-price with consumer-price inflation targeting by monetary authorities who have to learn the laws of motion for both inflation rates. Our results show that the Central Bank can reduce the volatility of consumption and asset price inflation more effectively if it does so with state-contingent preferences than with a Taylor-rule with fixed coefficients. In the state-contingent setup the policy authority reacts to asset price movements only if such movements cross critical thresholds

Suggested Citation

  • Paul D. McNelis & Guay Lim, 2006. "Inflation Targeting, Learning and Q Volatility in Small Open Economies," Computing in Economics and Finance 2006 104, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:104
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    References listed on IDEAS

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    More about this item

    Keywords

    Tobin's Q; learning; monetary policy rules; inflation targets;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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