Inflation Targeting, Announcements, and Imperfect Credibility
In virtually all theoretical studies of inflation targeting, the announced inflation target is treated as being fully credible. However, inflation targeting policies have typically been implemented after protracted periods of poor inflation performance when the policy authority's credibility is quite low. Because credibility imperfections may have a significant impact on inflation expectations and therefore on the monetary transmission mechanism, policies that are optimal under full credibility may not yield the best outcomes under imperfect credibility. In this article I use a simple dynamic model to study the implications that credibility imperfections have for the formulation of optimal inflation targeting policies.
|Date of creation:||Oct 2001|
|Date of revision:||Apr 2002|
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- Diana N. Weymark, 2000. "Using Taylor Rules as Efficiency Benchmarks," Vanderbilt University Department of Economics Working Papers 0043, Vanderbilt University Department of Economics, revised Sep 2001.
- 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.
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NBER Working Papers
8397, National Bureau of Economic Research, Inc.
- Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
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