Inflation targeting : a framework for communication

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Authors

Demertzis, Maria
Viegi, Nicola

Journal Title

Journal ISSN

Volume Title

Publisher

Berkeley Electronic Press

Abstract

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents’ expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.

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Keywords

Focal points, Credibility, Optimal band-width

Sustainable Development Goals

Citation

Maria Demertzis and Nicola Viegi (2009) “Inflation Targeting: A Framework for Communication,” The B.E. Journal of Macroeconomics: Vol. 9: Iss. 1 (Topics), Article 44. Available at: http://www.bepress.com/bejm/vol9/iss1/art44