Inflation Targeting, Announcements, and Imperfect Credibility
Working Paper No. 01-W24R
Diana N. Weymark
ABSTRACT [article]
In virtually all theoretical studies of
inflation targeting, the announced inflation target is treated as being fully credible.
However, inflation targeting policies have typically been implemented after protracted periods of poor inflation performance when the policy authority's credibility is quite low. Because credibility imperfections may have a significant impact on inflation expectations and therefore on the monetary transmission mechanism, policies that are optimal under full credibility may not yield the best outcomes under imperfect credibility. In this article I use a simple dynamic model to study the implications that credibility imperfections have for the formulation of optimal inflation
targeting policies.
Keywords: Inflation targeting, credibility, announcements, inflation bias
JEL Classification Number: E52