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Inflation Targeting in Practice: Models, Forecasts, and Hunches

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  • Rachel Lomax
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    Abstract

    This paper reviews the role that model-based forecasts play in the monetary policy process in the United Kingdom, with particular reference to the Bank of England’s new quarterly model and continuing research into other statistical approaches. The Bank’s models provide a consistent framework for considering alternative scenarios and risks but judgement always plays a large role in constructing forecasts. It is hard to say precisely how important forecasts are in driving policy decisions, but there is some evidence that the rethink of key issues during the forecast round has been a source of policy surprises. Forecasts also play a central part in communicating the Monetary Policy Committee’s thinking to the outside world. But forecasts are highly fallible. So the MPC’s forecast centered approach to inflation targeting has gone hand in hand with a determined effort to illustrate the wide range of uncertainties around its central projections. Copyright International Atlantic Economic Society 2005

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    File URL: http://hdl.handle.net/10.1007/s11293-005-8170-z
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    Bibliographic Info

    Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 33 (2005)
    Issue (Month): 3 (September)
    Pages: 251-265

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    Handle: RePEc:kap:atlecj:v:33:y:2005:i:3:p:251-265

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    Keywords: E40;

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    References

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    1. Charles Goodhart, 1999. "Recent Developments in Central Banking: Some Special Features of the Monetary Policy Committee and of the European System of Central Banks," FMG Special Papers sp118, Financial Markets Group.
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    Cited by:
    1. Raghbendra Jha, 2008. "Inflation targeting in India: issues and prospects," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 259-270.
    2. Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Working Paper Series 0978, European Central Bank.
    3. Ullrich, Katrin, 2008. "Inflation expectations of experts and ECB communication," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 93-108, March.
    4. Gomez, Miguel I. & Gonzalez, Eliana & Melo, Luis F. & Torres, Jose L., 2006. "Forecasting Food Price Inflation, Challenges for Central Banks in Developing Countries using an Inflation Targeting Framework: the Case of Colombia," 2006 Annual meeting, July 23-26, Long Beach, CA 21181, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Lars Svensson, 2006. "Optimal Inflation Targeting: Further Developments of Inflation Targeting," Working Papers Central Bank of Chile 403, Central Bank of Chile.

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