Inflation Band Targeting for a Solution to the Time Inconsistency Problem

Abstract:     
The purpose of this short paper is to show that inflation “band” targeting can solve the “time inconsistency” problem that exists under inflation “point” targeting by setting a relevant target range.

Moreover, we show that inflation band targeting has the following two advantages, besides allowing for supply-shock measurements.

1) It can produce output beyond natural levels, by setting the inflation rate within a target range and creating unexpected inflation. 2) It can mitigate inflation bias and help achieve a socially desirable inflation rate.

Number of Pages in PDF File: 8

Keywords: Time Inconsistency, Inflation Targeting

JEL Classification: E31, E52, E58, E61

working papers series