Inflation Zone Targeting

By Athanasios Orphanides, Volker Wieland. Social Science Research Network, 2000

283 citations recorded by the source corpus.

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zone-linear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies. We calibrate the model based on parameters for the U.S. and the euro area and employ a numerical dynamic programming algorithm to derive the optimal policies. With this algorithm, we examine the role of uncertainty, model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone. JEL Classification: E31, E52, E58, E61

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0e458ce6e1c09b6be34e2e77e2c4f34ba6c42a2b

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Guenter W. Beck
2. Ramón María-Dolores
3. Volker Wieland
4. Juan J. Dolado
5. M. Naveira

Citations in the corpus

• Central Bank Misperceptions and the Role of Money in Interest Rate Rules (2008, methodology): “An earlier note, Beck and Wieland (2007), presented an interest rate rule that incorporates such a shift5 and simulated a counterfactual example in the traditional Keynesian-style model with backward-looking dynamics of Svensson (1997), Orphanides and Wieland (2000) and Orphanides (2003).”
• Monetary Policy with Uncertain Parameters (2002, unknown): “Policy response over time, all parameters uncertain Note: The variances of at+l, fit+l, Yt+l are from Orphanides and Wieland (2000), and are 0.”
• Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve (2005, background): “…monopolistic competition may exhibit increasingly greater willingness to reduce prices under weak demand to avoid being undercut by rival 7rms. Orphanides and Wieland (2000) is, to our knowledge, the 7rst paper to consider this type of nonlinearity in the derivation of optimal reaction…”
• Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches (2001, unknown): “…regarding realtime assessments of the output gap (and the closely related “unemployment gap”) have been recently emphasized in a number of studies, including, Estrella and Mishkin (1999), McCallum (2001), McCallum and Nelson (1999), Orphanides et al. (2000), Smets (2002), and Wieland (1998).”