<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper uses a stochastic simulation of a DSGE model of the Czech economy to study the macroeconomic consequences of inflation target setting when interest rates are constrained by the zero lower bound. The distortions of this constraint depend non-linearly on the inflation target. For an inflation target of two percent the costs are negligible, but they increase steeply with lower target values. The largest impact is on the average values of output, consumption and investment; inflation is only slightly influenced. The volatility of all the variables considered increases significantly, but only for inflation targets that are close to zero. An inflation target of four percent does not bring additional benefits either in terms of lower volatility or in terms of higher average values.</p></abstract>

This paper uses a stochastic simulation of a DSGE model of the Czech economy to study the macroeconomic consequences of inflation target setting when interest rates are constrained by the zero lower bound. The distortions of this constraint depend non-linearly on the inflation target. For an inflation target of two percent the costs are negligible, but they increase steeply with lower target values. The largest impact is on the average values of output, consumption and investment; inflation is only slightly influenced. The volatility of all the variables considered increases significantly, but only for inflation targets that are close to zero. An inflation target of four percent does not bring additional benefits either in terms of lower volatility or in terms of higher average values.

Inflation Target and its Impact on Macroeconomy in the Zero Lower Bound Environment: the case of the Czech economy

Department of Economics, Faculty of Economics and Administration, Masaryk University, Brno, Czech Republic.

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This paper uses a stochastic simulation of a DSGE model of the Czech economy to study the macroeconomic consequences of inflation target setting when interest...

Inflation Target and its Impact on Macroeconomy in the Zero Lower Bound Environment: the case of the Czech economy

Published Online: Mar 17, 2016

Page range: 3 - 16

Received: Apr 02, 2015

Accepted: Jun 23, 2015

DOI: https://doi.org/10.1515/revecp-2016-0001

Keywords
zero lower bound on interest rate, inflation target, DSGE model

© 2016 Miroslav Hloušek, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Inflation Target and its Impact on Macroeconomy in the Zero Lower Bound Environment: the case of the Czech economy

Published Online: Mar 17, 2016

Page range: 3 - 16

Received: Apr 02, 2015

Accepted: Jun 23, 2015

DOI: https://doi.org/10.1515/revecp-2016-0001

Keywordszero lower bound on interest rate, inflation target, DSGE model

© 2016 Miroslav Hloušek, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
zero lower bound on interest rate, inflation target, DSGE model