This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. February 2025
  5. A Theory of Dynamic Inflation Targets

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

A Theory of Dynamic Inflation Targets

  • Christopher Clayton
  • Andreas Schaab
American Economic Review
vol. 115, no. 2, February 2025
(pp. 448–90)
Download Full Text PDF

Abstract

Should central banks' inflation targets remain set in stone? We study a dynamic mechanism design problem between a government and a central bank. The central bank has persistent private information about structural shocks. Firms learn the state from the central bank's reports and form inflation expectations. A dynamic inflation target implements the full-information commitment allocation. The central bank is delegated the authority to adjust the target's level and flexibility one period in advance. A declining natural interest rate and a flattening Phillips curve imply opposite optimal target adjustments. Our results speak to practical policy questions of inflation target design.

Citation

Clayton, Christopher, and Andreas Schaab. 2025. "A Theory of Dynamic Inflation Targets." American Economic Review 115 (2): 448–90. DOI: 10.1257/aer.20230496

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies