TY  - JOUR
AU  - King,Robert G.
AU  - Wolman,Alexander L.
TI  - Inflation Targeting in a St. Louis Model of the 21st Century
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5507
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5507
L1  - http://www.nber.org/papers/w5507.pdf
N1  - Author contact info:
Robert King
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-5941
E-Mail: rking@bu.edu

Alexander L. Wolman
Research Department
Federal Reserve Bank of Richmond
P.O. Box 27622
Richmond, VA 23261
Tel: 804/697-8262
Fax: 804/697-8217
E-Mail: alexander.wolman@rich.frb.org
AB  - 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.
ER  -