Of nutters and doves
Abstract: We argue that there are conditions such that any inflation targeting regime is preferable to full policy discretion, even if long-run inflation rates are identical across regimes. The key observation is that strict inflation targeting outperforms the discretionary policy response to sufficiently persistent shocks. Under full policy discretion, inflation expectations over the medium term respond to the shock and thereby amplify its impact on output. As a result, little output stabilization is achieved at the cost of large and persistent inflation fluctuations.
File(s): File format is text/html http://www.federalreserve.gov/pubs/ifdp/2006/885/default.htm
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/ifdp/2006/885/ifdp885.pdf
Part of Series: International Finance Discussion Papers
Publication Date: 2006