Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility

ByPeter Isard, Douglas Laxton, Ann-Charlotte Eliasson

January 1, 2001

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

Stochastic simulations are employed to compare performance of monetary policy rules in linear and nonlinear variants of a small macro model with NAIRU uncertainity under different assumptions about the way inflation expectations are formed. Cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenuously policy credibility strengthens the case for forward-looking inflation forecast based rules relative to backward-looking Taylor rules.

Subject: Financial services, Inflation, Inflation targeting, Labor, Monetary policy, Prices, Real interest rates, Unemployment, Unemployment rate

Keywords: credibility, IFB rule, Inflation, inflation expectation, inflation outcome, inflation rate, inflation targeting, inflation-unemployment process, monetary policy, monetary policy rules, NAIRU uncertainty, nominal interest rate, Real interest rates, Taylor rule, Unemployment, unemployment gap, Unemployment rate, WP

Pages:
41
Volume:
2001
DOI:
https://doi.org/10.5089/9781451842418.001
Issue:
007
Series:
Working Paper No. 2001/007
Stock No:
WPIEA0072001
ISBN:
9781451842418
ISSN:
1018-5941

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