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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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  14. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-61, September.
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  18. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  19. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  20. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
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  24. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
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