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In: Economics

Answer the following two questions: Discuss the main assumptions and principles of the inflation targeting monetary...

  1. Answer the following two questions:
    1. Discuss the main assumptions and principles of the inflation targeting monetary policy regime.
    2. Consider the following Central Bank (CB)’s loss function: ?? = (?? − ?? )2 +

?(?? − ??)2, where, in addition to the variables previously defined in (2), ?? is the inflation target and ? is a sensitivity parameter. Answer the following two questions:

  1. Assume that ? = 1, ? > 1 and ? < 1. Discuss the implications for the CB’s loss function for each value of ?; and represent graphically the respective loss functions.
  2. Derive the Monetary Rule for an inflation targeting CB: ?? − ?? =

−??(?? − ??); and discuss the main assumptions used to derive it.

Solutions

Expert Solution

Rahul Sunny answered 2 years ago
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