Munich Personal RePEc Archive

The Inflation Target at the Zero Lower Bound

Chattopadhyay, Siddhartha and Daniel, Betty C. (2014): The Inflation Target at the Zero Lower Bound.

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Abstract

We propose that the monetary authority adopt the inflation target as a time varying policy instrument at the zero lower bound (ZLB) with the same zeal with which they have adopted a fixed inflation target away from the ZLB. Specifically, after an extreme adverse shock reduces demand, the monetary authority promises future inflation by raising the inflation target in the Taylor Rule and announcing its persistence over time. The loss under our proposed policy is very similar to that under optimal monetary policy with the advantage that it is cummuicable using the language of the inflation target and implementable using the Taylor Rule. We also show that the inflation target and its persistence could be raised high enough to keep the economy away from the ZLB, but welfare costs are large.

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