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Inflation Targeting Under Imperfect Policy Credibility
Author:
International Monetary Fund
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Series:
IMF Working Papers
Volume/Issue:
Volume 2009: Issue 094
Language:
English
Publication Date:
01 Apr 2009
DOI:
https://doi.org/10.5089/9781451872415.001
ISBN:
9781451872415
ISSN:
1018-5941
Pages:
30
Keywords:
WP; interest rate; central bank; monetary policy
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2009: Issue 094