Inflation targeting in a simple macroeconomic model

H. Sonmez Atesoglu and John Smithin

Journal of Post Keynesian Economics, 2006, vol. 28, issue 4, 673-688

Abstract: In this paper, we argue that an explicit inflation-targeting policy is not likely to be a desirable monetary policy rule, even if it were agreed that a lower inflation rate is an important goal of policy. Inflation targeting is not neutral in the short or the long run, and a strict policy will tend to reduce the equilibrium growth rate. In terms of income distribution, a lower inflation target will tend to reduce real wages and profits and increase real interest rates, that is, the return to rentiers. In certain circumstances, it may still be possible to achieve a combination of both higher growth and lower inflation using other types of policy. However, this would actually require lower real interest rates, rather than the higher rates that are traditionally associated with anti-inflation policy.

Date: 2006
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DOI: 10.2753/PKE0160-3477280408

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