Working Paper: NBER ID: w12384
Authors: Frederic S. Mishkin; Niklas J. Westelius
Abstract: In this paper we examine how target ranges work in the context of a Barro-Gordon (1983) type model, in which the time-inconsistency problem stems from political pressures from the government. We show that target ranges turn out to be an excellent way to cope with the time-inconsistency problem, and achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy.
Keywords: No keywords provided
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation band targeting (E31) | time-inconsistency problem (D15) |
| inflation band targeting (E31) | excessive inflation (E31) |
| inflation band targeting (E31) | stabilize unemployment (J64) |
| inflation band targeting (E31) | socially optimal outcomes (D61) |
| inflation band targeting (E31) | optimal inflation contracts (E31) |
| narrow target range (E52) | high inflation volatility (E31) |