The Role of Inflation Target Adjustment in Stabilization Policy

Yunjong Eo, Denny Lie

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push-type shocks. Our proposed inflation target rule calls for the target to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock, which is essentially a makeup strategy. The inflation target rule, combined with a Taylor-type rule, significantly reduces inflation fluctuations originating from cost-push shocks and mitigates the stabilization trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.

Original languageEnglish
Pages (from-to)2007-2052
Number of pages46
JournalJournal of Money, Credit and Banking
Volume52
Issue number8
DOIs
Publication statusPublished - 2020 Dec

Bibliographical note

Publisher Copyright:
© 2019 The Ohio State University

Keywords

  • capital accumulation
  • cost-push shocks
  • E12
  • E32
  • E58
  • E61
  • flat Phillips curve
  • inflation-output trade-off
  • makeup strategy
  • medium-run inflation targeting
  • monetary policy
  • nominal wage rigidity
  • welfare analysis

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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