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Inflation Band Targeting and Optimal Inflation Contracts
Author(s) -
MISHKIN FREDERIC S.,
WESTELIUS NIKLAS J.
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00128.x
Subject(s) - economics , inflation (cosmology) , inflation targeting , exploit , incentive , monetary policy , monetary economics , keynesian economics , macroeconomics , price setting , microeconomics , computer science , computer security , physics , theoretical physics
In this paper we provide a theoretical treatment of how inflation target ranges cope with the time‐inconsistency problem arising from incentives for the monetary policymaker to exploit the short‐run trade‐off between employment and inflation to pursue short‐run employment objectives, as in a Barro‐Gordon (1983) model. Inflation band targets are able to achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy.