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Predictability of Average Inflation over Long Time Horizons




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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  • Allan Crawford, 2001. "Predictability of Average Inflation over Long Time Horizons," Bank of Canada Review, Bank of Canada, vol. 2001(Autumn), pages 13-20.
  • Handle: RePEc:bca:bcarev:v:2001:y:2001:i:autumn01:p:13-20

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    References listed on IDEAS

    1. George J. Benston & George G. Kaufman, 1998. "Deposit insurance reform in the FDIC Improvement Act: the experience to date," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 2-20.
    2. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, vol. 110(460), pages 335-362, January.
    3. Cohen, Daniel, 2001. "The HIPC Initiative: True and False Promises," International Finance, Wiley Blackwell, vol. 4(3), pages 363-380, Winter.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    5. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
    6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. David Laidler & William B.P. Robson, 2004. "Two Percent Target: The Context, Theory, and Practice of Canadian Monetary Policy since 1991," C.D. Howe Institute Policy Studies, C.D. Howe Institute, number 20041, January.
    2. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    3. Dodge, David, 2002. "Inflation targeting in Canada: Experience and lessons," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 113-124, August.

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