Defining Inflation Targets, the Policy Horizon and the Output-Inflation Tradeoff
AbstractThis paper shows the equivalence between different approaches to defining a central bank’s inflation objective. Defining a range and the percentage of time that inflation is expected to lie within that range is the same as defining a target for projected inflation within a given horizon. Both these definitions are in turn similar to defining the target in terms of the expected value and desired variance of inflation. All these definitions are connected by the actual process of inflation. A more volatile or persistent inflation increases the policy horizon. The paper also presents evidence on how inflation targets are actually defined in many countries and compares these stated targets with that implied by the actual process of inflation. To interpret these results, the paper presents a simple model, generalized in the appendices, to show how the central bank’s tolerance of deviations from the target, as well as the policy horizon, depend on the cost of output deviations from full employment, and on the slope and degree of backward-lookingness of the Phillips curve.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 415.
Date of creation: Mar 2007
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- O'Reilly, Gerard & Whelan, Karl, 2004.
"Has euro-area inflation persistence changed over time?,"
Working Paper Series
0335, European Central Bank.
- Gerard O'Reilly & Karl Whelan, 2005. "Has Euro-Area Inflation Persistence Changed Over Time?," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 709-720, November.
- O'Reilly,Gerard & Whelan, Karl, 2004. "Has Euro-Area Inflation Persistence Changed Over Time?," Research Technical Papers 4/RT/04, Central Bank of Ireland.
- Jordi Galí & Luca Gambetti, 2006.
"On the sources of the Great Moderation,"
Economics Working Papers
1041, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2007.
- Luca Gambetti & Jordi Gal�, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
- Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Fuhrer, Jeff & Moore, George, 1995.
The Quarterly Journal of Economics,
MIT Press, vol. 110(1), pages 127-59, February.
- David Romer, 1991.
"Openness and inflation: theory and evidence,"
Federal Reserve Bank of San Francisco, issue Nov.
- repec:nbr:nberre:0126 is not listed on IDEAS
- Svensson, Lars E.O., 1997.
"Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,"
615, Stockholm University, Institute for International Economic Studies.
- Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
- Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
- Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
- Lars E. O. Svensson, 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
- Gali, Jordi & Gertler, Mark, 1999.
"Inflation dynamics: A structural econometric analysis,"
Journal of Monetary Economics,
Elsevier, vol. 44(2), pages 195-222, October.
- Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
- Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
- Perron, P., 1989.
"Testing For A Unit Root In A Time Series With A Changing Mean,"
347, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
- de Gregorio, Jose, 1995. "Policy Accommodation and Gradual Stabilizations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 727-41, August.
- Barro, Robert J & Gordon, David B, 1983.
"A Positive Theory of Monetary Policy in a Natural Rate Model,"
Journal of Political Economy,
University of Chicago Press, vol. 91(4), pages 589-610, August.
- Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If references are entirely missing, you can add them using this form.