Inflation tolerance ranges in the New Keynesian model

Hervé Le Bihan, Magali Marx and Julien Matheron

Working papers from Banque de France

Abstract: A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range than when it is close to the target, ie the central value of the band. We show that a tolerance band should not be a zone of inaction: the lack of reaction within the band endangers macroeconomic stability and leads to the possibility of multiple equilibria; the trade-off between the reaction needed outside the range versus inside seems unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate a moderately lower reaction within tolerance band; these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.

Keywords: Monetary policy; inflation ranges; inflation bands; ZLB; endogenous regime switching. (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-eec, nep-isf, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... /documents/wp820.pdf

Related works:
Journal Article: Inflation tolerance ranges in the New Keynesian model (2023)
Working Paper: Inflation tolerance ranges in the new keynesian model (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:820

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().