Monetary Policy Under Inflation Targeting

Abstract

Monetary policy plays a central role in modern macroeconomics and many countries around the world has adopted inflation targeting as a guideline for policy. We emphasize and explain policy goals and then we assume that the central bank sets interest rates to ensure that these goals are met. We start with a simple model for a closed economy, where we briefly also discuss fi nancial stability. We then expand the model and consider open economies. We develop the analytical results, but we focus on graphical discussions. Effects of various disturbances are analyzed using comparative statics.