Optimal Infation Tolerance Band

Abstract

Recently, some inflation-targeting countries have started to use point targeting instead of tolerance band targeting, while most inflation-targeting countries still use tolerance band targeting. The main reason for the use of tolerance band targeting is to avoid serious inflation biases caused by a political interference. It is considered to be one of institutional arrangements; which is subclass of inflation contract and it modifies central bank’s preference by imposing the constraint on likelihood of inflation tolerance and also it is the most compromising method comparing to other institutional devices. Besides, it does not severely decrease the society welfare.