Inflation targeting as a means of achieving disinflation
- Publisher: University of Warwick, Department of Economics
HJ | Price Level | Business Fluctuations | Deflation E310 | Inflation | Monetary Policy E520 | Cycles E320 | Production E230 [Macroeconomics]
In this paper, we take an analytical approach to examine possible adverse effects of the use of inflation targeting as a disinflation regime. The idea is that a strict interpretation of an inflation target may preserve inflationary distortions after price stability is attained. We show that such a policy not only creates a slump in output but may increase macroeconomic volatility substantially in a model in which wages are subject to a Taylor staggering structure. The policy implication is that the problems associated with an excessively rigid inflation targeting policy are even more severe during a disinflationary episode.