Speed Limit Policies versus Inflation Targeting: A Free Lunch?

Michael Hatcher

No E2008/20, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Inflation targeting is currently popular with central banks. Is this popularity justified? I investigate this question by comparing a speed limit policy and inflation targeting with a Lucas-type Phillips curve capturing output gap persistence. If the output gap is at least moderately persistent, a speed limit policy can: (1) partly eliminate the state-contingent inflation bias, and (2) reduce inflation variability at no output gap variability cost.

Keywords: inflation targeting; speed limit policy; inflation bias; discretion; stabilisation (search for similar items in EconPapers)
JEL-codes: E50 E52 E58 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2008-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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