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Optimal Inflation Targeting Rules

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  • Marc P. Giannoni
  • Michael Woodford

Abstract

This paper characterizes optimal monetary policy for a range of alternative economic models in terms of a flexible inflation targeting rule, with a target criterion that depends on the model specification. It shows which forecast horizons should matter, and which variables besides inflation should be taken into account, for each specification. The likely quantitative significance of the various factors considered in the general discussion is then assessed by estimating a small, structural model of the U.S. monetary transmission mechanism with explicit optimizing foundations. An optimal policy rule is computed for the estimated model, and shown to correspond to a multi-stage inflation-forecast targeting procedure. The degree to which actual U.S. policy over the past two decades has conformed to the optimal target criteria is then considered.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9939.

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Date of creation: Sep 2003
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Publication status: published as Optimal Inflation-Targeting Rules , Marc Giannoni, Michael Woodford. in The Inflation-Targeting Debate , Bernanke and Woodford. 2005
Handle: RePEc:nbr:nberwo:9939

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