Working Paper: CEPR ID: DP10827
Authors: Alex Cukierman
Abstract: This paper investigates the relationship between the return path to price stability and the extent of flexibility in targeting inflation under perfect reputation as well as under imperfectly anchored inflation targeting systems characterized by imperfect reputation. The first part of the paper shows that the mapping from the flexibility parameter, to the return path to price stability is generally non-unique. It discusses reasons and consequences of this non-uniqueness, and proposes several ways to address the communication and related problems that this fact creates for the conduct of monetary policy. The second part investigates the impact of reputation (defined as the weight given by the public to preannounced interim targets in forming inflationary expectations) on the speed of inflation stabilization. The main result is that higher reputation is associated with faster stabilizations at all levels of the flexibility parameter.
Keywords: Anchoring expectations; Reputation; Return to price stability; Monetary policy flexibility; Inflation targeting
JEL Codes: E02; E31; E50; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexibility parameter (C61) | return path to price stability (E64) |
| higher reputation (Y70) | faster stabilization of inflation (E63) |