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Inflation Targeting Under Imperfect Policy Credibility
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Author/Editor: |
Alichi, Ali | Freedman, Charles | Johnson, Marianne | Kamenik, Ondra | Kisinbay, Turgut | Laxton, Douglas | Clinton, Kevin | Chen, Huigang |
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April 1, 2009 |
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Electronic Access: |
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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.
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Summary: This paper presents a model for Inflation Targeting under imperfect policy credibility. It modifies the conventional model in three ways: an endogenous policy credibility process, by which monetary policy can gain or lose credibility over time; non-linearities in the inflation equation and in the credibility generating process; and an explicit loss function. The model highlights problems associated with the practice of setting a series of rigid near-term inflation targets. Also, unfavorable supply shocks pose a difficult problem: an appropriate response involves an interest rate increase, some loss of output, and a period of increased inflation. A delayed response can result in a prolonged period of stagflation.
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Order a print copy
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Series: |
Working Paper No. 09/94 |
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Subject(s): |
Inflation targeting | Emerging markets | Monetary policy | Disinflation | Demand | Price increases | Economic models |
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Author's keyword(s): |
monetary policy
| credibility
| disinflation
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Published: |
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April 1, 2009 |
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Format: |
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Paper |
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Stock No: |
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WPIEA2009094 |
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Pages: |
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30 |
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Price: |
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US$18.00 (Academic Rate: US$18.00 )
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