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Flexibility In Inflation Targeting, Financial Markets And Macroeconomic Stability

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Executive Summary

Using an aggregate dynamic macroeconomic model, the authors study the macroeconomic and financial stability under flexible inflation-targeting regime associated with intermediate monetary growth target. Central banks, using the inflation target as a communication and strong nominal anchoring device, should also take into account the movements of asset prices in their optimal interest rate rule. They might react to changes in asset prices without introducing asset prices into the description of their policy objectives. They show that, the more flexible the inflation-targeting framework of monetary policy is, the more likely the monetary authorities are able to stabilise the economy around the long-term equilibrium.

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