Conservative Central Banks and Nominal Growth, Exchange Rate and Inflation Targets

Sang‐kun Bae and Ronald Ratti

Economica, 2008, vol. 75, issue 299, 549-568

Abstract: A framework is developed in which inflation biases with different target variables are compared. A nominal growth target measured in consumer prices may yield less stabilization bias than a nominal income growth target. Exchange rate and inflation targets result in less stabilization bias than an income growth target the more important the terms‐of‐trade stabilization. Persistence in output causes excessive stabilization of productivity shocks and of shocks to the terms of trade under discretion. An inflation‐weight conservative central bank is more likely under an inflation target than under an exchange rate target, and less likely under a nominal income growth target.

Date: 2008
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https://doi.org/10.1111/j.1468-0335.2007.00628.x

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