Flexibility in inflation targeting, financial markets and macroeconomic stability

Meixing Dai () and Moise Sidiropoulos

MPRA Paper from University Library of Munich, Germany

Abstract: Using an aggregate dynamic macroeconomic model, we study the macroeconomic and financial stability under flexible inflation-targeting regime associated with intermediate monetary growth target. Central banks, using the inflation target as a communication and strong nominal anchoring device, should also take into account the movements of asset prices in their optimal interest rate rule. They might react to changes in asset prices without introducing asset prices into the description of their policy objectives. We show that, the more flexible the inflation-targeting framework of monetary policy is, the more likely the monetary authorities are able to stabilise the economy around the long-term equilibrium. Therefore, achieving price stability under inflation-targeting regime with low flexibility can generate dynamic instability and will not be able to stabilise effectively the fluctuations of output and inflation. A commitment to a long run growth rate of money supply corresponding to the inflation target can reinforce the credibility of the central bank and the role of inflation target as strong and credible nominal anchor for private inflation expectations and allows the system to be more stability prone.

Keywords: Flexible inflation targeting; monetary targeting; optimal interest rate rule; stock price; financial development; financial markets; financial and macroeconomic instability (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2005-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13864/1/MPRA_paper_13864.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13864

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().