How credible is average and symmetric inflation targeting in an episode of high inflation?
- This article examines the risks and societal costs associated with flexible average inflation targeting in the United States and symmetric inflation targeting in the Eurozone. Employing an empirical approach, we analyze monthly cumulative inflation gaps over a monetary policy horizon of 36 months. By investigating the trajectories of the cumulative inflation gaps, we find a heavy tailed distribution and a 20 percent probability of over- and undershooting the inflation target. We exhibit that the offsetting mechanism introduced in the revised monetary strategies lack credibility in ensuring price stability during a period of persistent inflation. Consequently, the credibility of central banks may be compromised. The policy implications are the integration of an escape clause and prompt monetary corrections in cases where the inflation goal is not achieved. This study provides insights for policymakers and central banks, emphasizing challenges in maintaining credibility and price stability within the new monetary strategies.
Author of HS Reutlingen | Herzog, Bodo |
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DOI: | https://doi.org/10.1016/j.eap.2023.11.007 |
ISSN: | 0313-5926 |
eISSN: | 2204-2296 |
Erschienen in: | Economic analysis and policy |
Publisher: | Elsevier |
Place of publication: | Amsterdam |
Document Type: | Journal article |
Language: | English |
Publication year: | 2023 |
Tag: | average inflation targeting; central banking; monetary review; monetary strategy; symmetric inflation targeting; target credibility |
Volume: | 80 |
Page Number: | 12 |
First Page: | 1750 |
Last Page: | 1761 |
DDC classes: | 330 Wirtschaft |
Open access?: | Nein |
Licence (German): | In Copyright - Urheberrechtlich geschützt |