Learning and the monetary policy strategy of the European Central Bank [An article from: Journal of International Money and Finance]

by G.C. Lim, P.D. McNelis

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This digital document is a journal article from Journal of International Money and Finance, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

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This paper examines the welfare implications of alternative inflation targeting proposals for the monetary policy of the European Central Bank. We assume that policy makers have to ''learn'' the laws of motion of inflation in an economy characterized by ''stickiness'' in domestic price setting behavior and subjected to recurring shocks to productivity, exports and foreign price. We find that a switch from an ''asymmetric'' inflation targeting strategy to an ''symmetric'' makes little difference in welfare payoffs, but it comes at a cost of much higher interest-rate variability. We also find that there are practically no welfare gains from switching from an inflation-targeting strategy based on the Harmonized Index of Consumer Prices (HICP) to a strategy based on the domestic price component of the HICP.

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