Inflation Targeting - a Framework for Communication
Maria Demertzis and
Nicola Viegi ()
DNB Working Papers from Netherlands Central Bank, Research Department
More than a monetary policy strategy, we interpret inflation targeting as a framework for communication. We model monetary policy as an information game between the Bank and private agents. Our analysis shows how the provision of an explicit numerical inflation objective overcomes potential information imperfections by providing a focal point for agents who form expectations. Furthermore, the combination of the target and the tolerance bands around it communicated, provide a very clear framework with which to evaluate monetary policy outcomes. A successful Central Bank then builds up credibility and a credible Central Bank is in a better position to be successful in subsequent periods. We show how (and when) inflation targeting exploits this self-reinforcing loop to help the Central Bank endure large and long-lasting shocks. Last, we show that a trade-off emerges when choosing the band-width: too narrow bands provide a focal point but reduce the likelihood of inflation being successful'. Too wide bands on the other hand, lead easier to success but at the risk of failing to provide a clear focal point. We thus derive the optimal band-width for different scenarios.
Keywords: Monetary Policy; Communication; Focal Points; Credibility; Optimal Band-Width. (search for similar items in EconPapers)
JEL-codes: C71 C78 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Inflation Targeting: A Framework for Communication (2009)
Working Paper: Inflation Targeting: a Framework for Communication (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:149
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