Inflation-overshooting commitment: an analysis using a macroeconomic model

Abstract

Abstract This article examines the effectiveness of the makeup strategy for Japan’s economy, where inflation expectations formation is known to be largely adaptive. We build a small-scale macroeconomic model and conduct simulation analysis to study the implications of adopting the makeup strategy for early achievement of the inflation target and the incurring costs. Simulation results show that when the inflation rate has been below the target, it is effective to stabilize average inflation by offsetting the past inflation misses over some makeup windows and that when the natural rate of interest is lower, the optimal makeup window becomes longer.