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Inflation Inertia and the Optimal Hybrid Inflation/Price-Level Target
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 38, Number 8, December 2006
- pp. 2247-2251
- 10.1353/mcb.2007.0008
- Article
- Additional Information
A hybrid inflation/price-level target combines elements of both inflation and price-level targets. The paper derives an optimal hybrid target within a New Keynesian model with inflation persistence due to price indexation. The result generalizes a result by Vestin (forthcoming) that the optimal policy could be implemented with a price-level targeting regime. We show that the optimal price-level drift in the hybrid target is equal to the degree of price indexation. If there is complete indexation, the optimal monetary regime is inflation targeting.