Gaining Credibility for Inflation Targets
31 Pages Posted: 5 Oct 2001
Date Written: September 2001
Abstract
An inflation targeting central bank gains credibility as agents learn about the target over time. This is beneficial to the central bank because it brings the policy consistent with attaining the inflation target closer to that required to attain potential output. Optimal monetary policy entails endogenizing the learning process of agents and solving the resulting optimal-control problem. A linear approximation to the optimal-control problem is shown to be observationally equivalent to a "conservative central banker" in the sense of Rogoff (1985), and results in virtually all the gains that are available from higher-order approximations.
JEL Classification: E52
Suggested Citation: Suggested Citation
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