Of Nutters and Doves

32 Pages Posted: 26 Feb 2007

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Martin Bodenstein

Board of Governors of the Federal Reserve System

Date Written: November 2006

Abstract

We argue that there are conditions such that any inflation targeting regime is preferable to full policy discretion, even if long-run inflation rates are identical across regimes. The key observation is that strict inflation targeting outperforms the discretionary policy response to sufficiently persistent shocks. Under full policy discretion, inflation expectations over the medium term respond to the shock and thereby amplify its impact on output. As a result, little output stabilization is achieved at the cost of large and persistent inflation fluctuations.

Keywords: Monetary policy, inflation targeting, rules versus discretion

JEL Classification: E52, E58

Suggested Citation

Armenter, Roc and Bodenstein, Martin, Of Nutters and Doves (November 2006). FRB International Finance Discussion Paper No. 885. Available at SSRN: https://ssrn.com/abstract=964966 or http://dx.doi.org/10.2139/ssrn.964966

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Martin Bodenstein

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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