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Predictability of Average Inflation over Long Time Horizons

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    Uncertainty about the level of future inflation adversely affects the economy because it distorts the savings and investment decisions of households and businesses. Since these decisions typically involve planning horizons of many years, the adverse effects from inflation uncertainty can be reduced by adopting a policy framework that makes future inflation more predictable over long time horizons. When the inflation-control target was renewed in May 2001, the agreement affirmed that monetary policy will be directed at moving inflation to the 2 per cent midpoint of the target range over a six-to-eight-quarter horizon. The author describes how this policy commitment increases the predictability of average inflation over periods longer than one year. This relationship is illustrated using the Canadian experience from the inflation-targeting period.

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    Article provided by Bank of Canada in its journal Bank of Canada Review.

    Volume (Year): 2001 (2001)
    Issue (Month): Autumn ()
    Pages: 13-20

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    Handle: RePEc:bca:bcarev:v:2001:y:2001:i:autumn01:p:13-20
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