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Inflation Target Instability and Interest Rates

Author

Listed:
  • Mellin, Stefan

    (Dept. of Economics, Stockholm University)

Abstract
The implementation of explicit quantitative inflation targets elucidates the assessment of credibility of future monetary policy. Here the explicit inflation target is time-varying and stochastic with asymmetric information. It is shown that central bank independence promotes lower inflation but not at the cost of increased output variability. Marked political instability and instrument dependence are detrimental to credibility, and impede monetary policy with unchanged long term nominal interest rates. The marginal effect from less independence on interest rate volatility is increasing in political instability. Strategic delegation of an optimal inflation target with a monetary reform eliminates the inflation bias. Empirical evidence substantiates the predictions when confronted with cross-country OECD data.

Suggested Citation

  • Mellin, Stefan, 1998. "Inflation Target Instability and Interest Rates," Research Papers in Economics 1997:4, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:1997_0004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    inflation target; credibility; political instability; independence;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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