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Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation‐Output Variability Tradeoff

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  • James S. Fackler
  • W. Douglas McMillin

Abstract

We suggest a new way of computing the inflation‐output variability tradeoff under inflation forecast targeting. Our approach is based on dynamic, stochastic simulations of the average inflation rate over a two‐year horizon using the moving average representation of a vector autoregressive (VAR) model. Using real‐time data over two samples, we estimate the inflation‐output variability tradeoff for the United States and show that it has shifted favorably over time. We analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time.

Suggested Citation

  • James S. Fackler & W. Douglas McMillin, 2011. "Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation‐Output Variability Tradeoff," Southern Economic Journal, John Wiley & Sons, vol. 78(2), pages 424-451, October.
    • Handle: RePEc:wly:soecon:v:78:y:2011:i:2:p:424-451
    DOI: 10.4284/0038-4038-78.2.424
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    1. Kesavarajah Mayandy & Paul Middleditch, 2022. "Monetary policy and inflation–output variability in Sri Lanka: Lessons for developing economies," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 259-279, February.

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