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Inflation Targeting, Learning and Q Volatility in Small Open Economies

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Author Info
G. C. Lim () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
Paul D. McNelis (Fordham University)

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Abstract

This paper examines the welfare implications of managing asset-price with consumer-price inflation targeting by monetary authorities who have to learn the laws of motion for both inflation rates. The central bank can reduce the volatility of consumption as well as improve welfare more effectively if it adopts state-contingent Taylor rules aimed at inflation and Qgrowth targets in this learning environment. However, under perfect model certainty, pure inflation targeting dominates combined consumer and asset-price inflation targeting.

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Publisher Info
Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2006n22.

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Length: 37 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:iae:iaewps:wp2006n22

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Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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