Macroeconomic Policy during a Deflation Era : A Research on Effectiveness of Inflation Target Policies

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This research reports the results in three chapter research report In each chapter different aspects related to the implementation of the inflation targeting is reported. The summary of the chapters are followings.In the first chapter, the theoretical model for the inflation targeting is reported. A novel feature of the model, formation of expectations about the parameters of the model, indicated the following results.(1) Optimal equilibrium resulting from the "commitment' to the policy is the unique one which is equivalent to that of Barro-Gordon(2) One of the most important results from this chapter is indicating the two equilibriums when the policy is discretionary. The first one is called "active" equilibrium and the second one is called "passive" equilibrium. Under the formal one, deflation may be caused by the monetary policy.(3) Under the "passive" discretionary monetary policy, there is a possibility of hyper-inflation; however, this does not happen unless the policy authority … More aims at the above-natural rate of output(4) If an instability of the economy is not because of the aggressive output policy of the authority, but because of the stochastic disturbances in the economy, the passive monetary policy is preferable to the active monetary policy.(5) Inflation targeting policy will result in success if the economy is under inflation in passive equilibrium; however; the policy will likely to fail if the policy is active where deflation is prevalent This is because that the equilibria are instable.(6) If the authority chooses to the output stabilizing policy, it will over act relative to the public's expectations.The main themes of the following two chapters are to estimate the various aspects of implementations of the inflation targeting policy. In the second chapter, to evaluate the policy response function, the major data in estimation is carefully examined. Particularly, variable series of GDP, call rate, consumption of non-durables and services and effective exchange rate are examined for the presence of trends. After the examination, three methods of non-structural measure of detrending are applied to the GDP series. Actual estimation of a policy response function is remained for the successive researches. In the third chapte4 the conceptual aspect of the natural rate of interest is summarized. The natural rate of interest rate corresponds to the natural rate of unemployment and policy authority would use a benchmark to evaluate the current status of her economy. Less