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Essays on inflation and monetary policy

by Kim, Junhan

Abstract (Summary)
Despite the success of inflation tageting in the 1990s around the world, recognizing the weaknesses of inflation targeting, many have argued that more refinements are needed. When output is persistent, inflation targeting tends to have high long-run inflation volatility. So price-path targeting, which promises lower inflation volatility, can be considered as an alternative. However, I argue that an optimally chosen hybrid of inflation targeting and price-path targeting gives even lower inflation volatility. Another weakness of inflation targeting is that central bankers, when left to act under discretion, tend to create a bias toward output stabilization. Therefore, I argue that central bankers should be appropriately conservative, and the level of conservativeness depends on output persistence. Also, I show that there is a close relationship between central bankers' conservativeness and the horizon over which price level is brought back to the desired path. One of the important aspects of inflation targeting is that it is inherently forward-looking. So, this requires a good inflation forecast, such as trimmed mean estimators suggested here. I show several methods of finding these trimmed mean estimators of inflation, which are more efficient than headline CPI inflation. However, these suggestions and elaborations should be implemented together with measures to earn the public's trust, without which success cannot be guaranteed. That is, central banks need to find the right balance between performing monetary policy optimally and earning the public's trust.
Bibliographical Information:

Advisor:

School:The Ohio State University

School Location:USA - Ohio

Source Type:Master's Thesis

Keywords:inflation targeting monetary policy central bank hybrid conservative

ISBN:

Date of Publication:01/01/2003

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