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Can a Higher Inflation Target Reduce Inflation Volatility?
Author(s) -
Karras Georgios
Publication year - 2017
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12142
Subject(s) - economics , volatility (finance) , inflation (cosmology) , keynesian economics , real interest rate , monetary economics , monetary policy , new keynesian economics , econometrics , physics , theoretical physics
This paper investigates the relationship between inflation and inflation volatility. Using monthly data from 1913 to 2013, the results show that U.S. inflation and its volatility have been positively correlated when inflation exceeds a certain value, but negatively correlated when inflation is below this threshold. The evidence also suggests that inflation volatility is minimized between annual inflation rates of 1 and 3.6%, which includes both the 2% inflation target of many central banks, and the 3.5% break point predicted by the New Keynesian model of Coibion et al . ([Coibion, O., 2012]), but not the 4% inflation target recommended by Ball ([Ball, L., 2013]) and Krugman ([Krugman, P., 2013]).