Open-Economy Inflation-Forecast Targeting
AbstractWe study simple inflation-forecast targeting in an open-economy setting. Simple inflation-forecast targeting implies setting an interest rate which, if kept unchanged throughout the forecast-targeting horizon, produces a conditional inflation forecast equal to the inflation target at the end of the horizon. We find that the optimal forecast-targeting horizon is relatively short (one year). A longer horizon does not consistently contribute to improved output stability, indeed it increases exchange rate variability and traded sector variability. The targeting procedure is substantially inferior to the optimal pre-commitment policy. Moreover, the targeting procedure does not necessarily determine the rational-expectations equilibrium and is subject to time inconsistency. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2006.
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Bibliographic InfoArticle provided by Verein für Socialpolitik in its journal German Economic Review.
Volume (Year): 7 (2006)
Issue (Month): (02)
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