NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation Targeting in a St. Louis Model of the 21st Century

Robert G. King, Alexander L. Wolman

NBER Working Paper No. 5507
Issued in March 1996
NBER Program(s):   EFG

Inflation targeting is a monetary policy rule that has implications for both the average performance of an economy and its business cycle behavior. We use a modern, rational expectations model to study the twin effects of this policy rule. The model highlights forward- looking consumption and labor supply decisions by households and forward-looking investment and price-setting decisions by firms. In it, monetary policy has real effects because imperfectly competitive firms are constrained to adjust prices only infrequently and satisfy all demand at posted prices. In this 'sticky price' model, there are also effects of the average rate of inflation on the amount of time that individuals must devote to shopping activity and on the average markup of price over cost that firms can charge. However, in terms of the welfare effects of long-run inflation, it is optimal to set monetary policy so that the nominal interest rate is close to zero, replicating in an imperfectly competitive model the result that Friedman found under perfect competition. A perfect inflation target has desirable effects on the response of the macroeconomy to permanent shocks to productivity and money demand. Under such a policy rule, the monetary authority makes the money supply evolve so a model with sticky prices behaves much like one with flexible prices.

download in pdf format
   (1820 K)

email paper

This paper is available as PDF (1820 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5507

Published:

  • King, Robert G. & Wolman, Alexander L., 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574. ,
  • Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-107.

Users who downloaded this paper also downloaded these:
Rudebusch and Svensson Policy Rules for Inflation Targeting
Woodford w5684 Control of the Public Debt: A Requirement for Price Stability?
Goodfriend and King The New Neoclassical Synthesis and the Role of Monetary Policy
King and Wolman What Should the Monetary Authority Do When Prices Are Sticky?
Bernanke, Gertler, and Gilchrist w6455 The Financial Accelerator in a Quantitative Business Cycle Framework
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us