The central bank's optimal reaction to foreign and domestic shocks is analyzed in an inflation targeting model allowing … that the interest rate response to foreign shocks is smaller when pass-through is low. Second, the inflation …

other reaction coefficients, on inflation and output, are sub-optimal. However, an indirect exchange rate response, through … a policy reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, is welfare enhancing. This … result is independent of whether society values domestic or CPI inflation stabilization. …

I compare nominal GDP level targeting to flexible inflation targeting in a small New Keynesian model subject to the …, for a standard calibration, inflation targeting under discretion leaves the economy open to a deflationary trap. Nominal … level rule. These result suggest that inflation targeting should not be ditched. Still, it can be improved significantly, by …

. Finally, the presence of inflation can generate a substantial asymmetry in price adjustments. This asymmetry could lead to …

inflation is found to be quite sensitive to the unemployment gap. An increase in cyclical unemployment by 1 percentage point … will reduce inflation by approximately 0.6 percentage points within a year. …