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Optimal monetary policy and the role of hybrid inflation-price-level targets

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Abstract:

This study investigates the role of hybrid inflation-price-level targets as a solution to the well-known stabilization bias problem that arises under discretionary policies. The analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank's target variables in addition to the output gap growth target. The reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way. In particular, the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500119042

Affiliations: Department of Economics, Chukyo University

Publication date: October 10, 2005

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