Inflation Targeting Under Imperfect Policy Credibility

Turgut Kisinbay (), Ondra Kamenik, Ali Alichi, Charles Freedman, Marianne Johnson, Kevin Clinton, Huigang Chen and Douglas Laxton

No 09/94, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Inflation targeting; Emerging markets; Monetary policy; Disinflation; Demand; Price increases; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-04-28
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