Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the...

T his paper investigates the asymmetric behavior of inflation. We use logistic smooth transition autoregressive (LSTAR) model to characterize the regime-switching behavior of Iran’s monthly inflation during the period May 1990 to December 2013. We find that there is a triple relationship between the inflation level, its fluctuations and persistence. The findings imply that the behavi...

This paper assesses the prospects for the new Polish monetary policy strategy of inflation targeting. Regarding the general requirements for implementing an inflation targeting strategy it appears that Poland has made sufficient progress in reducing fiscal dominance and hardening budget constraints. The paper also finds that the exchange rate has played a dominant role as a policy instrument, w...

In a standard overlapping generations model, active monetary policy reinforces mechanisms that lead to equilibrium indeterminacy and to countercyclical behavior of young-age consumption. The policy rule which minimizes inflation volatility can be active or passive, depending on the characteristics of shocks and the risk aversion of households. Inflation forecast errors are always greater under ...

In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector new-Keynesian model to evaluate different inflation targeting rules in economies with financial frictions. We conclude that, in the presence of financial frictions, a welfaremaximizing central bank should adopt flexible head...

A prominent policy issue of the 1970s and one that seems certain to dominate the early 1980s is the appropriate response to a prevailing high rate of inflation. The view that there is a long-run trade-off between inflation and unemployment, widely accepted at the end of the sixties, is now held by only a small minority of economists. It is still widely believed, however, that there is a short-r...

We inspect how inflation target announcements are instrumental in building central bank credibility and shaping the public’s inflation expectations. Investigating the role of announcements in two early adopters of inflation targeting by using a time varying credibility measure, we find that both the accuracy and the frequency of inflation announcements have a positive impact on how much attenti...

I report some personal views and reflections on transparency experiences and transparency challenges following my first year and a half as Deputy Governor at Sveriges Riksbank regarding (1) flexible inflation targeting, (2) the role of transparency in inflation targeting and committee decisions on instrument-rate paths, (3) the management of interest-rate expectations, and (4) the publishing of...