Inflation Targeting Under Imperfect Policy Credibility
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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.
Series:
Working Paper No. 2009/094
Subject:
Disinflation Inflation Inflation targeting Output gap Supply shocks
English
Publication Date:
April 1, 2009
ISBN/ISSN:
9781451872415/1018-5941
Stock No:
WPIEA2009094
Pages:
30
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