A Model for Full-Fledged Inflation Targeting and Application to Ghana

Author/Editor:

Kevin Clinton ; Jihad Dagher ; Ondrej Kamenik ; Douglas Laxton ; Ali Alichi ; Marshall Mills

Publication Date:

January 1, 2010

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.

Series:

Working Paper No. 2010/025

Subject:

English

Publication Date:

January 1, 2010

ISBN/ISSN:

9781451962444/1018-5941

Stock No:

WPIEA2010025

Pages:

30

Please address any questions about this title to publications@imf.org