Working Paper: NBER ID: w9672
Authors: Stephen G. Cecchetti; Junhan Kim
Abstract: The dramatic improvement in macroeconomic outcomes during the 1990s - stable, low inflation and high, stable growth - can be at least partly ascribed to improved monetary policy. Central banks became more independent and many of them adopted inflation targeting. This paper examines the potential for further improvements by refining the concept of inflation targeting. We construct a general model that encompasses a broad array of possible target regimes, and apply it to the data. Our results suggest that the vast majority of countries could benefit from moving to pricepath targeting, where the central bank makes up for periods of above (below) target inflation with later periods of below (above) target inflation.
Keywords: Inflation Targeting; Price-Path Targeting; Output Variability
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| improved monetary policy (E52) | macroeconomic stability (E60) |
| improved monetary policy (E52) | lower inflation (E31) |
| improved monetary policy (E52) | higher growth (O49) |
| shift to price-path targeting (E63) | economic performance (P17) |
| shift to price-path targeting (E63) | reduce output variability (C29) |
| shift to price-path targeting (E63) | enhance overall economic stability (E60) |
| choice between inflation targeting and price-path targeting (E31) | optimal regime (H21) |
| hybrid targeting regime (E63) | optimize performance (L21) |
| hybrid targeting regime (E63) | modest benefits compared to strict inflation targeting (E63) |