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A NOTE ON THE ANCHORING EFFECT OF EXPLICIT INFLATION TARGETS

Published online by Cambridge University Press:  19 October 2009

Jan Libich*
Affiliation:
La Trobe University and CAMA
*
Address correspondence to: Jan Libich, La Trobe University, School of Economics and Finance, Melbourne, Victoria, 3086, Australia; e-mail: [email protected].

Abstract

Empirical literature provided convincing evidence that explicit (i.e., legislated) inflation targets anchor expectations. I propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework I identify several factors that influence whether and how strongly expectations are anchored, namely (i) the public's cost of decision making, (ii) the public's inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.

Type
Notes
Copyright
Copyright © Cambridge University Press 2009

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