Inflation Targets and the Objective of Full Employement

Jose De Gregorio

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper shows the equivalence between different approaches to the inflationary objective. Defining a range and the percentage of time expected to be within such range is the same as defining a target for inflation projection in a given horizon. Both forms are similar to defining a target in terms of the expected value and desired variance for inflation. Likewise, it shows that the tolerance to deviations from the inflation target, directly associated to the policy horizon, depends on the costs of inflation deviations from the target, and also on output deviations from full employment. Therefore, setting the target in terms of an inflationary objective does not overlook the importance of unemployment nor of the output gap in monetary policy decisions.

Date: 2006-05
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