One significant change in the US economy last 20 years is trend decline real interest rates that pushes policy rate near effective lower bound (ELB) and puts downward pressure on inflation. This environment leaves conventional monetary tools less accommodating adverse shocks. To better achieve Federal Reserve’s dual mandate at ELB, FOMC adopted a new framework called average inflation targeting...

Flexible inflation targeting has been advocated as a practical approach to the implementation of an optimal state-contingent monetary policy, but theoretical expositions reaching this conclusion have typically abstracted from the fiscal consequences of monetary policy. Here we extend the standard theory by considering the character of optimal monetary policy under a variety of assumptions about...

This paper critically examines a new literature that supports price-level targeting (PT) over inflation targeting (IT).1 This literature shows that it is better for the central bank (the Bank) to gradually wrestle the price level, rather than the inflation rate, back to the target path. PT provides a firm nominal anchor for expectations, and thereby conditions private sector expectations in a w...

this is the first study to attempt to explain income inequality using unemployment and inflation and international cross-sectional data. using a sure system, inflation is found to have an increasing impact on the shares of the lower 80% of the income distribution, while reducing the share of the highest 20%. unemployment has a negative effect on the share of the first 40%, while increases the s...

Over the last five years, a number of authors have suggested that targeting inflation rates of, say, less than 3 per cent could lead to significant economic difficulties. In the period prior to the renewal of the inflation target, Bank staff have reviewed the literature and have undertaken new research into this issue. The Bank also held a seminar at which papers by both Bank staff and outside ...

This paper outlines what inflation targeting involves for emerging market/transition countries and discusses the advantages and disadvantages of this monetary policy strategy. The discussion suggests that although inflation targeting is not a panacea and may not be appropriate for many emerging market countries, it can be a highly useful monetary policy strategy in a number of them. Frederic S....

Interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. Developing countries are better suited for it, however, in light of big supply shocks and terms of trade shocks, such as monsoon rains and oil import price shocks in the case of India. Under annual inflation targeting (IT), the full impact of adverse supply shocks is felt as lost real GDP. NGDP targeti...

This paper compares the performances of three alternative nominal anchors, i.e., price inflation, nominal income growth, and money growth in an estimated monetary business cycle model. The representative household’s lifetime utility is used as a natural welfare metric, and the welfare effects of the non-linear dynamics are captured by a quadratic approximate solution method. Strict inflation ta...