A Model for Full-Fledged Inflation Targeting and Application to Ghana, Issues 2010-2025
International Monetary Fund, Jan 1, 2010 - Business & Economics - 30 pages
A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.
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Baseline IT with Imperfect Credibility 20092019
Negative Demand Shock with Full Credibility 20092019
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Alichi annual because quarterly Bank of Ghana Baseline Nominal Interest Batini central bank conﬁdence Cumulative Output Gap Czech National Bank depreciation of cedi deviations of inﬂation economy excess demand expansionary expectations of inﬂation Figure ﬁrst ﬁscal ﬂexible Full Credibility Full-Fledged Inﬂation Targeting GDP Growth year-on-year I00 percent IMF staff calculations Imperfect Credibility increase in inﬂation increase represents depreciation inﬂation expectations inﬂation rate inﬂation reduction inﬂationary interest rate increase long-run target loss-minimizing low inﬂation low-inﬂation objective monetary policy Negative Demand Shock Negative supply shock Nominal Interest Rate Norges Bank optimal policy percentage points Phillips curve policy action policy interest rate policy loss function policy rate policymakers Positive Demand Shock Positive supply shock quarterly GDP data rate of inﬂation Real Exchange Rate Real GDP Growth real interest rate reﬂects reported in Ghana shock that leads Shock with Full Shock with Imperfect short-run signiﬁcantly transmission mechanism vanables are quarterly variability