| ||||
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.
Full paper (267 KB PDF)
| Full paper (screen reader version)
PDF files: Adobe Acrobat Reader ZIP files: PKWARE Home | IFDPs | List of 2006 IFDPs Accessibility | Contact Us Last update: February 20, 2007 |