A Model for Full-Fledged Inflation Targeting and Application to Ghana
31 Pages Posted: 15 Feb 2010
Date Written: Janurary 2010
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
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