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Inflation Targeting in Practice: Models, Forecasts, and Hunches

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  • Rachel Lomax

Abstract

This paper reviews the role that model-based forecasts play in the monetary policy process in the United Kingdom, with particular reference to the Bank of England’s new quarterly model and continuing research into other statistical approaches. The Bank’s models provide a consistent framework for considering alternative scenarios and risks but judgement always plays a large role in constructing forecasts. It is hard to say precisely how important forecasts are in driving policy decisions, but there is some evidence that the rethink of key issues during the forecast round has been a source of policy surprises. Forecasts also play a central part in communicating the Monetary Policy Committee’s thinking to the outside world. But forecasts are highly fallible. So the MPC’s forecast centered approach to inflation targeting has gone hand in hand with a determined effort to illustrate the wide range of uncertainties around its central projections. Copyright International Atlantic Economic Society 2005

Suggested Citation

  • Rachel Lomax, 2005. "Inflation Targeting in Practice: Models, Forecasts, and Hunches," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(3), pages 251-265, September.
  • Handle: RePEc:kap:atlecj:v:33:y:2005:i:3:p:251-265
    DOI: 10.1007/s11293-005-8170-z
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    References listed on IDEAS

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    1. Charles Goodhart, 1999. "Recent Developments in Central Banking: Some Special Features of the Monetary Policy Committee and of the European System of Central Banks," FMG Special Papers sp118, Financial Markets Group.
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    Cited by:

    1. Ullrich, Katrin, 2008. "Inflation expectations of experts and ECB communication," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 93-108, March.
    2. Lars E. O. Svensson, 2007. "Optimal inflation Targeting: Further Developments of Inflation Targeting," Central Banking, Analysis, and Economic Policies Book Series,in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 6, pages 187-225 Central Bank of Chile.
    3. Gomez, Miguel I. & Gonzalez, Eliana & Melo, Luis F. & Torres, Jose L., 2006. "Forecasting Food Price Inflation, Challenges for Central Banks in Developing Countries using an Inflation Targeting Framework: the Case of Colombia," 2006 Annual meeting, July 23-26, Long Beach, CA 21181, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Bank of England working papers 356, Bank of England.
    5. Lars E.O. Svensson, 2006. "The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example," Working Papers 75, Princeton University, Department of Economics, Center for Economic Policy Studies..
    6. Raghbendra Jha, 2008. "Inflation targeting in India: issues and prospects," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 259-270.

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    Keywords

    E40;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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