Policy Conflicts and Inflation Targeting: The Role of Credit Markets

37 Pages Posted: 22 May 2018

See all articles by Woon Gyu Choi

Woon Gyu Choi

International Monetary Fund (IMF); The Bank of Korea; Bank of Korea - Economic Research Institute

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: April 2018

Abstract

This paper shows that stabilizing volatility in credit growth often conflicts with price stability: unusual credit expansions often occur when inflation is low relative to goals, and credit slumps often appear when inflation is overshooting. We find that central banks with inflation targeting (IT) are responsive to credit conditions in both advanced economies and emerging-market economies (EMEs). However, EMEs are more sensitive to inflation conditions, responding to credit growth only when consistent with IT. Macroprudential measures are also deployed to address credit growth volatility when orthodox policy moves would be inconsistent with IT, complementing monetary policy.

Keywords: Inflation targeting, Central banks and their policies, Policy Conflicts, Taylor rule, and Macroprudential Policy, Credit Growth, Macroprudential Policy, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E52, E58, F32

Suggested Citation

Choi, Woon Gyu and Cook, David E., Policy Conflicts and Inflation Targeting: The Role of Credit Markets (April 2018). IMF Working Paper No. 18/72, Available at SSRN: https://ssrn.com/abstract=3182491

Woon Gyu Choi (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States

The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794, 100-794

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

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