Abstract

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.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 2247-2251
Launched on MUSE
2007-01-22
Open Access
No
Archive Status
Archived 2007
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