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Optimal Inflation Targeting: Further Developments of Inflation Targeting

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  • Lars Svensson

Abstract

The introduction of inflation targeting has led to major progress in practical monetary policy. Nevertheless, inflation-targeting central banks can make substantial additional progress by being more specific, systematic, and transparent about their operational objectives (in the form of using an explicit intertemporal loss function), their forecasts (in the form of deciding on optimal projections of the instrument rate and the target variables), and their communication (in the form of announcing optimal projections of the instrument rate and target variables). Furthermore, progress can be made by incorporating central-bank judgment and model uncertainty in a systematic way in the forecasting and decision process. In particular, incorporating model uncertainty allows the central bank to do more general “distribution forecast targeting” rather than the more restrictive “mean forecast targeting” under the assumption of approximate certainty equivalence.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 403.

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Date of creation: Dec 2006
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Handle: RePEc:chb:bcchwp:403

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  1. RUGE-MURCIA, Francisco .J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche 2001-04, Universite de Montreal, Departement de sciences economiques.
  2. Eric M. Leeper & Tao Zha, 2003. "Modest policy interventions," Working Paper 2003-24, Federal Reserve Bank of Atlanta.
  3. Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies.
  4. Laurence H. Meyer, 2004. "Practical problems and obstacles to inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 151-160.
  5. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-63, October.
  6. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2007. "New Keynesian Models for Chile in the Inflation-Targeting Period," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 13, pages 507-546 Central Bank of Chile.
  7. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  9. Rachel Lomax, 2005. "Inflation Targeting in Practice: Models, Forecasts, and Hunches," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 251-265, September.
  10. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
  11. Eric Leeper, 2003. "An "Inflation Reports" Report," NBER Working Papers 10089, National Bureau of Economic Research, Inc.
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Cited by:
  1. Svensson, Lars E O, 2009. "Transparency under Flexible Inflation Targeting: Experiences and Challenges," CEPR Discussion Papers 7213, C.E.P.R. Discussion Papers.
  2. Bedri Kamil Onur Tas, 2007. "Inflation Targeting as a Signalling Mechanism," Working Papers 0701, TOBB University of Economics and Technology, Department of Economics.

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