A Model for Full-Fledged Inflation Targeting and Application to Ghana

31 Pages Posted: 15 Feb 2010

See all articles by Ali Alichi

Ali Alichi

International Monetary Fund (IMF)

Kevin Clinton

Government of Canada - Bank of Canada

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Ondra Kamenik

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Marshall Mills

International Monetary Fund (IMF)

Date Written: Janurary 2010

Abstract

A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.

Keywords: Central banks, Disinflation, Economic models, External shocks, Ghana, Inflation rates, Inflation targeting, Low-income developing countries, Monetary policy, Public information, Transparency

Suggested Citation

Alichi, Ali and Clinton, Kevin and Dagher, Jihad C. and Kamenik, Ondra and Laxton, Douglas and Mills, Marshall, A Model for Full-Fledged Inflation Targeting and Application to Ghana (Janurary 2010). IMF Working Papers, Vol. , pp. 1-30, 2010. Available at SSRN: https://ssrn.com/abstract=1552292

Ali Alichi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kevin Clinton

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
613-782-8766 (Phone)
613-782 7508 (Fax)

Jihad C. Dagher (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

Ondra Kamenik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

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

700 19th Street NW
Washington, DC 20431
United States

Marshall Mills

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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