The Role of Inflation Target Adjustment in Stabilization Policy

Yunjong Eo and Denny Lie

Journal of Money, Credit and Banking, 2020, vol. 52, issue 8, 2007-2052

Abstract: How and under what circumstances can adjusting the inflation target serve as a stabilization‐policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost‐push‐type shocks. Our proposed inflation target rule calls for the target to be adjusted in a persistent manner and in the opposite direction to the realization of a cost‐push shock, which is essentially a makeup strategy. The inflation target rule, combined with a Taylor‐type rule, significantly reduces inflation fluctuations originating from cost‐push shocks and mitigates the stabilization trade‐off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.

Date: 2020
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Citations: View citations in EconPapers (3)

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https://doi.org/10.1111/jmcb.12688

Related works:
Working Paper: The Role of Inflation Target Adjustment in Stabilization Policy (2019)
Working Paper: The role of inflation target adjustment in stabilization policy (2017)
Working Paper: The Role of Inflation Target Adjustment in Stabilization Policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:8:p:2007-2052

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