Inflation Band Targeting for a Solution to the Time Inconsistency Problem

The purpose of this short paper is to show that inflation “band” targeting can solve the “time inconsistency” problem that exists under inflation “point” targeting by setting a relevant target range. Moreover, we show that inflation band targeting has the following two advantages, besides allowing for supply-shock measurements. 1) It can produce output beyond natural levels, by setting the inflation rate within a target range and creating unexpected inflation. 2) It can mitigate inflation bias and help achieve a socially desirable inflation rate