Inflation Targets as a Stabilization Device

32 Pages Posted: 8 May 2003

See all articles by Lavan Mahadeva

Lavan Mahadeva

Bank of England - Monetary Analysis

Gabriel Sterne

Bank of England

Abstract

We highlight important aspects and consequences of using inflation targets during disinflation. Our illustrative theoretical model suggests annual revisions to short run are larger when the target is undershot than when the target is overshot. We confirm the result using cross-country panel estimates from a unique data set of inflation target misses in 60 countries in the 1990s. During disinflation the decision to change the target and policy instrument may sometimes be difficult to separate. Such short-term targets may be more akin to conditional forecasts than policy rules, but their publication nevertheless increases transparency and hence helps policymakers to achieve lower inflation.

Suggested Citation

Mahadeva, Lavan and Sterne, Gabriel, Inflation Targets as a Stabilization Device. Available at SSRN: https://ssrn.com/abstract=317843

Lavan Mahadeva (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Gabriel Sterne

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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