Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility

41 Pages Posted: 30 Jan 2006

See all articles by Peter Isard

Peter Isard

International Monetary Fund (IMF) - Research Department

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Ann-Charlotte Eliasson

Deutsche Bank Research

Date Written: January 2001

Abstract

Stochastic simulations are employed to compare performances of monetary policy rules in linear and nonlinear variants of a small macro model with NAIRU uncertainty under different assumptions about the way inflation expectations are formed. Cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenously to the monetary authorities` track record in delivering low inflation. It is shown that endogenous policy credibility strengthens the case for forward-looking inflation forecast based rules relative to backward-looking Taylor rules.

Keywords: inflation targeting, monetary policy rules, credibility, NAIRU uncertainty

JEL Classification: C51, E31, E52

Suggested Citation

Isard, Peter and Laxton, Douglas and Eliasson, Ann-Charlotte, Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility (January 2001). IMF Working Paper No. 01/7, Available at SSRN: https://ssrn.com/abstract=879320

Peter Isard (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ann-Charlotte Eliasson

Deutsche Bank Research ( email )

Taunusanlage 12
60325 Frankfurt am Main
Germany