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Targeting Inflation by Constant-Interest-Rate Forecasts

  • Leitemo, Kai

This paper reviews the concept of constant-interest-rate inflation forecast (CIR) targeting. It stresses the time-inconsistent nature of CIR targeting and provides a new method for constructing CIR forecasts consistently in the context of models with forward-looking variables. A dynamic New Keynesian model with forward-looking price setting is used as an illustration, suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities' objective to smooth interest rate movements, as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 4 (August)
Pages: 609-26

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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:4:p:609-26
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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