INFLATION TARGET ZONES AS A COMMITMENT MECHANISM

Abstract

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.