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Drifting Inflation Targets and Monetary Stagflation

Shujaat Khan and Edward Knotek ()

No 1426, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting inflation target. Once the inflation target is fixed, the incidence of stagflation in the baseline model is essentially eliminated. In contrast with several other recent papers that have focused on the connection between monetary policy and stagflation, we show that while high uncertainty about monetary policy actions can be conducive to the occurrence of stagflation, imperfect information more generally is not a requisite channel to generate stagflation.

Keywords: imperfect nformation; onetary policy; time-varying inflation target; inflation; rules; stagflation (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-11-03, Revised 2014-11-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Drifting inflation targets and monetary stagflation (2015) Downloads
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