In this paper the authors analyze flexible inflation targeting and nominal income targeting as two different monetary strategies in a simple dynamic macromodel. The key results of this paper are: first, for both targeting regimes optimal monetary policy response leads to a shock-dependent...

"Inflation targeting is a monetary-policy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability....

Low inflation hit the Japanese economy shortly after the burst of the bubble in stocks and real estate in 1991 and has haunted the domestic economy ever since. The bubbles were partly attributable to prolonged monetary easing in the second half of 1980s, which was conducted to increase domestic...