What Difference Would an Inflation Target Make?
28 Pages Posted: 6 Dec 2012
Date Written: 2005
Critics of an explicit inflation target argue that it would require additional fluctuations in real output and unemployment. I argue that theory and practice have shown this alleged dilemma to be a false one. However, an inflation target would demand more communication. The Fed would need to place an inflation target in the context of a policy rule that explains the strategy for achieving it. It would also need to communicate a model of the economy that clarifies the tradeoffs faced by monetary policymakers.
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