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

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

January 1, 2010

Preview Citation

Format: Chicago

Kevin Clinton, Jihad Dagher, Ondrej Kamenik, Douglas Laxton, Ali Alichi, and Marshall Mills. A Model for Full-Fledged Inflation Targeting and Application to Ghana, (USA: International Monetary Fund, 2010) accessed September 18, 2024

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.

Subject: Central bank policy rate, Inflation, Inflation targeting, Output gap, Supply shocks

Keywords: Interest rate, Monetary policy, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/025
Stock No:

WPIEA2010025
ISBN:

9781451962444
ISSN:

1018-5941

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