DP4151 Signalling and Commitment: Monetary versus Inflation Targeting

Author(s): Hans Gersbach, Volker Hahn
Publication Date: December 2003
Keyword(s): central banks, commitment, inflation targeting, monetary targeting, signalling
JEL(s): E50, E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4151

This Paper compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and, because of verifiability problems, the transparency solution is not feasible. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.