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Unstable inflation targets

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Branch_Targets_JMCB_FINAL_13June16.pdf (742.9Kb)
Date
06/2017
Author
Branch, William A.
Evans, George W.
Keywords
Inflation target
Monetary policy
Expectations
Adaptive learning
HB Economic Theory
HG Finance
NDAS
BDC
R2C
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Abstract
This paper studies long-run inflation targets and stability in an imperfect information environment. When central banks set an inflation target that is not fully communicated, agents draw inferences about inflation from recent data and remain alert to structural change in their econometric model by forming expectations from a forecasting model that is estimated via discounted least squares. Inflation targets can lead agents' beliefs to depart from rational expectations through two channels. First, implementing a higher inflation target can lead to overshooting of the target. Second, there can be nearly self-fulfilling inflation, disinflation, or deflation that arises as an endogenous response to shocks. Policy implications for implementing a higher target without deanchoring expectations are discussed.
Citation
Branch , W A & Evans , G W 2017 , ' Unstable inflation targets ' , Journal of Money, Credit and Banking , vol. 49 , no. 4 , pp. 767-806 . https://doi.org/10.1111/jmcb.12397
Publication
Journal of Money, Credit and Banking
Status
Peer reviewed
DOI
https://doi.org/10.1111/jmcb.12397
ISSN
0022-2879
Type
Journal article
Rights
© 2017 The Ohio State University. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at: https://doi.org/10.1111/jmcb.12397
Description
Financial support from National Science Foundation Grant no. SES-1025011 is gratefully acknowledged.
Collections
  • University of St Andrews Research
URI
http://hdl.handle.net/10023/17712

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