Description

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.

Taxonomy

Demand , Economic development , Economic policy , Monetary policy

More publications in this series: Working Papers

More publications by: Turgut Kisinbay ; Ondra Kamenik ; Ali Alichi ; Charles Freedman ; Marianne Johnson ; Kevin Clinton ; Huigang Chen ; Douglas Laxton