Signalling and Commitment: Monetary Versus Inflation Targeting

38 Pages Posted: 12 Jan 2004

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Volker Hahn

University of Konstanz

Date Written: December 2003

Abstract

This Paper compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and, because of verifiability problems, the transparency solution is not feasible. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.

Keywords: Central banks, inflation targeting, monetary targeting, signalling, commitment

JEL Classification: E50, E52, E58

Suggested Citation

Gersbach, Hans and Hahn, Volker, Signalling and Commitment: Monetary Versus Inflation Targeting (December 2003). Available at SSRN: https://ssrn.com/abstract=486902

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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Volker Hahn

University of Konstanz ( email )

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