Optimal Inflation Target Under Uncertainty

Posted: 25 Dec 2004

See all articles by Hirofumi Uchida

Hirofumi Uchida

Kobe University - Graduate School of Business Administration

Hiroshi Fujiki

Chuo University - Faculty of Commerce

Abstract

We derive an optimal state-contingent inflation target in an economy under uncertainty. This inflation target can improve inefficiencies stemming from two sources: the lack of commitment to predetermined policies and the lack of coordination between the monetary and fiscal authorities. We then discuss the pros and cons of our proposal compared with the solution proposed by Beetsma and Bovenberg [Beetsma, R.M.W.J., Bovenberg, A.L., 2001]. When does an inflation target yield the second best? Scandinavian Journal of Economics 103, 119-126], paying special attention to their practical feasibility. We will show that in some countries where there is a highly independent central bank, our proposal is more attractive.

Keywords: Inflation targeting, Uncertainty, Conservativeness, Policy coordination, Time inconsistency problem

JEL Classification: E50, H60

Suggested Citation

Uchida, Hirofumi and Fujiki, Hiroshi, Optimal Inflation Target Under Uncertainty. Japan and the World Economy, Vol. 17, No. 4, pp. 470-479, 2005, Available at SSRN: https://ssrn.com/abstract=632905

Hirofumi Uchida (Contact Author)

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501
Japan
81-78-803-6949 (Phone)

HOME PAGE: http://www.b.kobe-u.ac.jp/~uchida

Hiroshi Fujiki

Chuo University - Faculty of Commerce ( email )

742-1, Higashinakano
Hacihoji
Tokyo, 192-0393
Japan

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