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Inflation Targeting: to Forecast or to Simulate

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Author Info
Michal Skorepa (Czech National Bank)
Viktor Kotlan (Czech National Bank)

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Abstract

Inflation targeting is a regime based to a great extent on communication and, more specifically, on using and communicating assessments of future inflation. The central banking literature, however, devotes surprisingly little attention to some important issues connected with such assessments. There are some non-trivial choices that need to be made regarding future inflation assessments on three distinct levels: construction, decision making and communication. One of the most important choices relates to the treatment of the central bank’s behaviour within the assessment. We first differentiate between two basic ways of assessing future inflation: forecast and simulation. A forecast is the most likely picture of the future. In a forecast, all agents are assumed to behave in the most likely way. A simulation, on the other hand, is the most likely picture of the future if the behaviour of one agent follows a predetermined path or is generated using a selected reaction function. The path or reaction function ascribed to the agent does not have to be the most likely one. After differentiating between a forecast and a simulation, we discuss the pros and cons of using the two ways of assessing future inflation on the three abovementioned levels.

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Paper provided by EconWPA in its series Macroeconomics with number 0304007.

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Length: 19 pages
Date of creation: 16 Apr 2003
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Handle: RePEc:wpa:wuwpma:0304007

Note: Type of Document - ; pages: 19. CNB Internal Research and Policy Note 1/03
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Web page: http://129.3.20.41

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Related research
Keywords: inflation targeting forecast simulation central bank decision making communication

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Find related papers by JEL classification:
E - Macroeconomics and Monetary Economics
E - Macroeconomics and Monetary Economics

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References listed on IDEAS
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.:
  1. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April. [Downloadable!] (restricted)
  2. Eric M. Leeper & Tao Zha, 2002. "Modest Policy Interventions," NBER Working Papers 9192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Professor Lars E O Svensson, 2001. "Independent review of the operation of monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, March. [Downloadable!]
  4. Tim Hampton, 2002. "The role of the Reserve Bank's macro model in the formation of interest rate projections," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, June. [Downloadable!]
  5. 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.
  6. Charles A.E. Goodhart, 2001. "Monetary transmission lags and the formulation of the policy decision on interest rates," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 165-186. [Downloadable!]
  7. Jan Kees Martijn & Hossein Samiei, 1999. "Central Bank Independence and the Conduct of Monetary Policy in the United Kingdom," IMF Working Papers 99/170, International Monetary Fund.
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  1. David Navrátil & Viktor Kotlán, 2005. "Is the CNB Predictable?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(7-8), pages 333-343, July. [Downloadable!]
  2. Viktor Kotlan & David Navratil, 2003. "Inflation Targeting as a Stabilisation Tool: Its Design and Performance in the Czech Republic," Macroeconomics 0310006, EconWPA. [Downloadable!]
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