We inspect how inflation target announcements are instrumental in building central bank credibility and shaping the public’s inflation expectations. Investigating the role of announcements in two early adopters of inflation targeting by using a time varying credibility measure, we find that both the accuracy and the frequency of inflation announcements have a positive impact on how much attenti...

This paper examines the relationship between inflation and wage indexation in the postwar U.S. using data on the prevalence of cost-of-living adjustments in major collective bargaining agreements. I find that increases in inflation precede increases in wage indexation but reductions in inflation do not precede reductions in wage indexation. There is virtually no evidence that wage indexation af...

Recent empirical evidence by Fair (2002, 2005) and Giordani (2003) shows that a positive inflation shock with the nominal interest rate held constant has contractionary effects. These results cannot be reconciled with the standard ‘New Synthesis’ literature. This paper reconsiders the effects of inflation shocks in a simple New Keynesian framework extended to include wealth effects. It is shown...

The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the micro founded loss function that represents the objective function of the optimal monetary policy no...

In the United States, there is an ongoing debate about the possible adoption of an explicit numerical inflation target for the Federal Reserve. An important facet of this debate regards what numerical value such a target should have. Bernanke et al. (1999, p. 28-30) discuss four reasons why an inflation targeting central bank should target a positive inflation rate: 1) CPI-based measures of inf...

In this paper, we examine whether a monetary authority targets the exchange rate, per se, or instead simply appears to do so as it responds to the exchange rate and other variables in service to inflation and output targets. We combine data-rich estimation with a system of forward-looking equations in order to disentangle the possibilities. The combined approach reveals the potentially misleadi...

Two major developments marked the monetary sector in emerging market economies (EMEs) in the 1990s. One was the steady decline in the inflation rate to low levels in the second half of the decade. The other was the growing preference for conducting monetary policy based on inflation targeting. For example, average inflation in 10 of the 14 EMEs discussed in this paper declined to a single digit...