Policy Conflicts and Inflation Targeting: The Role of Credit Markets

Author/Editor:

Woon Gyu Choi ; David Cook

Publication Date:

April 6, 2018

Electronic Access:

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Summary:

This paper shows that stabilizing volatility in credit growth often conflicts with price stability: unusual credit expansions often occur when inflation is low relative to goals, and credit slumps often appear when inflation is overshooting. We find that central banks with inflation targeting (IT) are responsive to credit conditions in both advanced economies and emerging-market economies (EMEs). However, EMEs are more sensitive to inflation conditions, responding to credit growth only when consistent with IT. Macroprudential measures are also deployed to address credit growth volatility when orthodox policy moves would be inconsistent with IT, complementing monetary policy.

Series:

Working Paper No. 2018/072

Subject:

English

Publication Date:

April 6, 2018

ISBN/ISSN:

9781484350515/1018-5941

Stock No:

WPIEA2018072

Pages:

36

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