Unstable inflation targets
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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.
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
Journal of Money, Credit and Banking
© 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
DescriptionFinancial support from National Science Foundation Grant no. SES-1025011 is gratefully acknowledged.
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