In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained...

This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price...

Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented....

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant...

This paper investigates the performance of optimised interest rate rules when there is uncertainty about a key determinant of the monetary transmission mechanism, namely the degree of persistence characterising the inflation process. The paper focuses on the euro area and utilises two variants...

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zone-linear relationship between inflation and...

The inflation targeting policy, which is adopted in a lot of countries in recent years, has been introduced with a band target in most countries. However, in the many theoretical analysis, the target of the inflation rate is assumed to be a point, and the studies that have treated the following...

Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these...

This paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary...

The purpose of this short paper is to show that inflation “band” targeting can solve the “time inconsistency” problem that exists under inflation “point” targeting by setting a relevant target range. Moreover, we show that inflation band targeting has the following two advantages,...