INFLATION TARGETING WITH IMPERFECT INFORMATION*

Aloisio Araujo, Tiago Berriel and Rafael Santos

International Economic Review, 2016, vol. 57, issue 1, 255-270

Abstract: In a global games setup with imperfect commitment technology, we show that low targets—the ones close to the optimal inflation under perfect commitment—are unattainable, leading to a trade‐off between low and credible targets. Moreover, since noisy public information helps to coordinate expectations around the announced target, our article supports unconventional policy prescriptions. First, weaker countries need to impose higher targets. Second, less transparency helps to make the announced target credible and then reduces the optimally announced target. Results are based on a general central bank loss function encompassing models traditionally used to discuss central bank decisions.

Date: 2016
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