Drifting Inflation Targets and Monetary Stagflation
This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting inflation target. Once the inflation target is fixed, the incidence of stagflation in the baseline model is essentially eliminated. In contrast with several other recent papers that have focused on the connection between monetary policy and stagflation, we show that while high uncertainty about monetary policy actions can be conducive to the occurrence of stagflation, imperfect information more generally is not a requisite channel to generate stagflation.
Keywords: stagflation, inflation, time-varying inflation target, monetary policy rules, imperfect information.
JEL classifications: E31, E52.
Suggested citation: Khan, Shujaat, and Edward S. Knotek II, 2014. “Drifting Inflation Targets and Monetary Stagflation,” Federal Reserve Bank of Cleveland, Working Paper no. 14-26.