The choice of flexibility in targeting inflation during normal times and during disinflation

Alex Cukierman

No 10827, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates the relationship between the return path to price stability and the extent of flexibility in targeting inflation under perfect reputation as well as under imperfectly anchored inflation targeting systems characterized by imperfect reputation. The first part of the paper shows that the mapping from the flexibility parameter, to the return path to price stability is generally non-unique. It discusses reasons and consequences of this non-uniqueness, and proposes several ways to address the communication and related problems that this fact creates for the conduct of monetary policy. The second part investigates the impact of reputation (defined as the weight given by the public to preannounced interim targets in forming inflationary expectations) on the speed of inflation stabilization. The main result is that higher reputation is associated with faster stabilizations at all levels of the flexibility parameter.

Keywords: Anchoring expectations; Reputation; Return to price stability (search for similar items in EconPapers)
JEL-codes: E02 E31 E50 E52 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: The choice of flexibility in targeting inflation during normal times and during disinflations (2015)
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