Inflation Targeting And The Multiplier Accelerator Principle

Abstract

In this paper we consider a closed economy and using the multiplier – accelerator principle we develop a simple dynamic New Keynesian type model in our effort to determine the time paths of income, actual and expected inflation towards their long – run equilibrium values. The equilibrium values of actual and expected inflation are proved to be affected by government expenditures and the growth rate nominal money supply. Assuming that the Central Bank is interested in stability of real stock of money supply, we specify the rule of determination of the growth rate in nominal money supply. The use of this rule guarantees the equality between inflation and the growth rate of nominal money supply and permits Central Bank to offset the effects of an expansionary fiscal policy on the real stock of money. The theoretic conclusions of our analysis are affirmed by the simulation results presented in the fourth section of our paper.