Inflation Targeting and Output Stability

Author/Editor:

Esteban Jadresic

Publication Date:

April 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper reexamines the effects of inflation targeting on output stability. It considers an economy with staggered price setting that is exposed to price shocks and where the policymaker cannot observe the current realizations of aggregate output and inflation. The paper shows that, if some price shocks can be anticipated, the effects of inflation targeting depend critically on the inflation indicator being targeted. Specifically, targeting headline inflation can severely destabilize output, while targeting inflation indicator of sticky prices may eliminate that problem and make the response of the output gap to aggregate shocks short-lived.

Series:

Working Paper No. 1999/061

Subject:

Inflation Inflation targeting Monetary base Output gap Sticky prices

English

Publication Date:

April 1, 1999

ISBN/ISSN:

9781451848151/1018-5941

Stock No:

WPIEA0611999

Pages:

39

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