Optimal Policy When the Inflation Target is not Optimal

Sergio Alves

No 271, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: I assess the optimal policy to be followed by a welfare-concerned central bank when assigned an inflation target that is not necessarily welfare-optimal. I treat the inflation target as the trend inflation and I have three main contributions: (i) a welfare-based loss function fully derived under trend inflation, showing how the non-optimal inflation target acts as an extra inefficiency source; (ii) I show that the trend inflation does affect the relative weight of the output gap: they are inversely related; (iii) under trend inflation, I derive time consistent optimal policies with both unconditional and timeless commitment, and I show how to translate the pursuit of the inflation target into an additional constraint in the minimization step.

Date: 2012-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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