A Note on Structural Uncertainty, Flexibility and Monetary Policy Credibility: An Inflation Targeting Approach for the Post-Covid Period

Abstract Since the Covid-19 pandemic, many economic policy protocols have come under scrutiny regarding their ability to handle unforeseen events and systemic effects. In particular, inflation targeting regimes have been questioned due to significant inflationary deviations resulting from a substantial rise in firms’ operating costs and, simultaneously, the necessary accommodation of shocks by central banks through a reduction in real interest rates to address the recessionary impacts of the pandemic. This brief article explores institutional channels and builds an original optimization analysis of the trade-off between flexibility and credibility as attributes of monetary policy, thereby highlighting aspects that make inflation targeting regimes a resilient framework for dealing with the structural uncertainty surrounding central bank decisions in the post-Covid era.