Inflation Forecast or Forecast(s) Targeting?

The paper refers to L.E.O. Svensson’s concept of inflation forecast targeting (IFT) and its implementation by central banks of Sweden, Norway and the Czech Republic. The study focuses on (1) inflation forecasts published by selected central banks, i.e. headline inflation and core or monetary policy-relevant (MPR) inflation, which are made on the assumption of endogenous instrument rate, (2) one-year consumer inflation expectations, and (3) repo rate decisions. The aim of the paper is to investigate whether MPR and core inflation forecasts (in addition to headline inflation forecasts) are useful tools in implementing IFT. The authors take into consideration differences between forecasts deviations from the inflation target, dependencies between forecasts and consumer inflation expectations and relationships between repo rate decisions and forecasts. The methodology used includes nonparametric tests and statistics (Sign Test, Wilcoxon Matched Pair Test, Nonparametric Correlation coefficients) and forecast errors analysis. The results are sufficiently positive to conclude that the implementation of IFT in central banking practice should be supplemented by forecasts of core inflation. The paper contributes to the literature on implementing monetary policy under the concept of IFT. It spotlights the importance of publication of core inflation forecasts that are not captured by other research undertakings, which tend to ignore the existence of them as such.