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INFLATION TARGETING WITH IMPERFECT INFORMATION*
Author(s) -
Araujo Aloisio,
Berriel Tiago,
Santos Rafael
Publication year - 2016
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12155
Subject(s) - transparency (behavior) , imperfect , perfect information , inflation (cosmology) , economics , inflation targeting , monetary policy , function (biology) , central bank , monetary economics , microeconomics , computer science , computer security , philosophy , linguistics , physics , evolutionary biology , theoretical physics , biology
In a global games setup with imperfect commitment technology, we show that low targets—the ones close to the optimal inflation under perfect commitment—are unattainable, leading to a trade‐off between low and credible targets. Moreover, since noisy public information helps to coordinate expectations around the announced target, our article supports unconventional policy prescriptions. First, weaker countries need to impose higher targets. Second, less transparency helps to make the announced target credible and then reduces the optimally announced target. Results are based on a general central bank loss function encompassing models traditionally used to discuss central bank decisions.