Problems with monetary policy transmission lags
A paper published by the Bank of Finland investigates how lags in monetary policy transmission can damage the credibility of inflation-targeting central bankers.
The paper finds that if prices react more slowly than output to changes in interest rates, then inflation targeting does not maximise welfare. This is because when only output is reacting to the change, inflation is predetermined and so the best policy is to stabilise the output gap.
To read the paper, click here
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