Can a Higher Inflation Target Reduce Inflation Volatility?

15 Pages Posted: 31 Oct 2017

See all articles by Georgios Karras

Georgios Karras

University of Illinois at Chicago - Department of Economics

Date Written: November 2017

Abstract

This paper investigates the relationship between inflation and inflation volatility. Using monthly data from 1913 to 2013, the results show that U.S. inflation and its volatility have been positively correlated when inflation exceeds a certain value, but negatively correlated when inflation is below this threshold. The evidence also suggests that inflation volatility is minimized between annual inflation rates of 1 and 3.6%, which includes both the 2% inflation target of many central banks, and the 3.5% break point predicted by the New Keynesian model of Coibion et al. ([Coibion, O., 2012]), but not the 4% inflation target recommended by Ball ([Ball, L., 2013]) and Krugman ([Krugman, P., 2013]).

Suggested Citation

Karras, Georgios, Can a Higher Inflation Target Reduce Inflation Volatility? (November 2017). Metroeconomica, Vol. 68, Issue 4, pp. 777-791, 2017, Available at SSRN: https://ssrn.com/abstract=3062287 or http://dx.doi.org/10.1111/meca.12142

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