Working Paper: CEPR ID: DP4151
Authors: Hans Gersbach; Volker Hahn
Abstract: This Paper compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and, because of verifiability problems, the transparency solution is not feasible. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.
Keywords: Central Banks; Commitment; Inflation Targeting; Monetary Targeting; Signalling
JEL Codes: E50; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation targeting (E31) | central banks commit to low inflation (E52) |
| monetary targeting (E52) | potential for deception (D91) |
| inflation targeting (E31) | lower expected social losses (J17) |
| monetary targeting (E52) | higher expected social losses (J17) |
| inflation targeting (E31) | tighter link between announced targets and actual inflation outcomes (E61) |
| information asymmetries (D82) | effectiveness of inflation targeting (E52) |