Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility
41 Pages Posted: 30 Jan 2006
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: Suggested Citation
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