In Noise We Trust? Optimal Monetary Policy with Random Targets

Working Paper 06-14
by Ethan Cohen-Cole and Bogdan Cosmaciuc
2006 Series

We show that a monetary policy in which the central bank commits to a randomized inflation target allows for potentially faster-expectations convergence than with a fixed target. The randomized target achieves faster convergence in particular in transition environments: those demonstrating either particularly high or low inflation.

Keywords: monetary policy, asymmetric information, Bayesian rational expectations, commitment

JEL Classifications: E52, E61, E42

PDF version of paper PDF