Lecture 171 Macroeconomic Analysis 2003 Monetary Policy: Inflation Targeting Interest Determination Policy Loss Function Mankiw ( 18 ) Blanchard (27 ) Miles and Scott (12 )

Lecture 172 Learning Objectives Inflation Targeting: Rule or Discretion? Taylor Rule for Interest Determination Inflation Bias of the Government Central Bank Independence Loss Function for Policy Analysis

Lecture 173 Policy Rule vs. Optimal Discretion for Inflation Targeting

Lecture 174 Optimal Inflation Under the Policy Rule

Lecture 175 Optimal Inflation Under the Discretion

Lecture 176 Interest Determination Rule to Achieve the Inflation Target: Taylor Rule

Lecture 177 Reduced Form Equation of the Interest Determination Model

Lecture 178 Interest Rule: A Numerical Example Target inflation2.50% Target interest rate (basic)5.00% Initial interest rate11.00% Initial output gap2.00% Initial inflation2.00% a0.5 b c0.25 d-0.5 ad-square ==> (ad)square >4bcd for stability 4bcd ==>-0.25 Year sOutput gap Inflation gap Actual interest rate

Lecture 179

10 Why Should the Central Bank Be Independent? Inflation Biases of a Government and a Central Bank

Lecture 1711 Inflationary Bias Model-Loss Functions of a Government and a CB and Supply Constraint

Lecture 1712 Inflation Bias of the Government

Lecture 1713 Inflation Bias of the Central Bank

Lecture 1714 Inflation Bias When the Central Bank is under the Spell or when it is Completely Independent

Lecture 1715 Lessons for Price Stability From Analysis of the Central Bank Independence

Lecture 1716 Exercises Target inflation under the policy rule Target inflation under the discretion Interest rate determination rule Examples from the interest determination Inflation bias of the government Should the Central Bank be Independent?