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Implementing Optimal Policy Through Inflation-Forecast Targeting

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  • Svensson, Lars E O
  • Woodford, Michael

Abstract

We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinacy of equilibrium, so as to reproduce a socially optimal equilibrium. We also evaluate these variants in terms of the transparency of the connection with the ultimate policy goals and the robustness to model perturbations. A suitably designed inflation-forecast targeting rule can achieve the social optimum and at the same time have a more transparent connection to policy goals and be more robust than competing instrument rules.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4229.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4229

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Keywords: commitment; discretion; inflation targeting;

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