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

Alex Cukierman*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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.

Original languageEnglish
Pages (from-to)494-502
Number of pages9
JournalResearch in Economics
Volume69
Issue number4
DOIs
StatePublished - 1 Dec 2015

Keywords

  • Flexibility in targeting inflation
  • Monetary policy
  • New-Keynesian economy
  • Reputation and anchoring of expectations
  • Return path to price stability

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