INFLATION TARGET ZONES AS A COMMITMENT MECHANISM

In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way.

Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

Given the frequency of price changes, the real effect of a monetary shock is smaller if ad-justing firms are the ones with older and, hence, more misaligned prices. This selection effect is important in a large class of sticky-price models with time-dependent price adjustment. We characterize conditions on the distribution of price durations associated with impact of mon-etary shocks: 1) Adjusting prices are older and real effects are smaller if the hazard function is more strongly increasing. 2) Adjusting prices are younger and real effects are larger if there is heterogeneity in price setting. 3) Adjusting prices are older and real effects are smaller if the durations of price spells is less variable. 4) The real effect of a shock to the growth rate of nominal income increases in the skewness of price spells. 5) Quantitative exercises show that it is enough to match the first two moments of the distribution of durations to get accurate real effects of monetary shocks. 6) The results in this paper generalize to the “sticky-information” setting proposed by Mankiw and Reis (2002)