Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212572 
Year of Publication: 
2005
Series/Report no.: 
BOFIT Discussion Papers No. 20/2005
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
Abstract: 
The paper proposes a new indicator of expected real effects of a policy aimed at controlling inflation.The indicator, called real effect of inflation targeting (REIT), involves the comparison of expected and output-neutral inflation.It is shown that it can be derived from a simple two-dimensional vector autoregressive model of inflation and output gap.The microdynamics of such model are explained in terms of the foundations of Taylor-type staggered wage contracts.It is assumed that the monetary authority has some discretion regarding the timing of monetary actions.Here REIT can be used to set the optimal times for such actions, if the control of output is regarded as a secondary policy target.A simulation experiment illustrates the rationale of such a device for timing monetary measures.The REIT has been used by the Polish Monetary Policy Council since 2001 in it's inflation targeting and is thought to have contributed to a substantial decline in Polish inflation in 2003 and to an increase in output growth in 2004.A similar indicator computed for Russia as a means of monitoring monetary policy rather than as an active tool confirms that active expansionary policy in 2002 and 2003 might have contributed to Russian economic growth in 2004 and 2005, whereas similar policy measures for 2004 are likely to prove ineffective.
Persistent Identifier of the first edition: 
ISBN: 
952-462-806-6
Document Type: 
Working Paper

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