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Of nutters and doves

Roc Armenter () and Martin Bodenstein

No 885, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We argue that there are conditions such that any inflation targeting regime is preferable to full policy discretion, even if long-run inflation rates are identical across regimes. The key observation is that strict inflation targeting outperforms the discretionary policy response to sufficiently persistent shocks. Under full policy discretion, inflation expectations over the medium term respond to the shock and thereby amplify its impact on output. As a result, little output stabilization is achieved at the cost of large and persistent inflation fluctuations.

Keywords: Inflation (Finance); Anti-inflationary policies; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2006
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Journal Article: Of Nutters and Doves (2009) Downloads
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