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Optimal Inflation Targeting: Further Developments of Inflation Targeting

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  • Lars Svensson

Abstract

The introduction of inflation targeting has led to major progress in practical monetary policy. Nevertheless, inflation-targeting central banks can make substantial additional progress by being more specific, systematic, and transparent about their operational objectives (in the form of using an explicit intertemporal loss function), their forecasts (in the form of deciding on optimal projections of the instrument rate and the target variables), and their communication (in the form of announcing optimal projections of the instrument rate and target variables). Furthermore, progress can be made by incorporating central-bank judgment and model uncertainty in a systematic way in the forecasting and decision process. In particular, incorporating model uncertainty allows the central bank to do more general “distribution forecast targeting” rather than the more restrictive “mean forecast targeting” under the assumption of approximate certainty equivalence.

Suggested Citation

  • Lars Svensson, 2006. "Optimal Inflation Targeting: Further Developments of Inflation Targeting," Working Papers Central Bank of Chile 403, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:403
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    References listed on IDEAS

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    Cited by:

    1. Sweidan, Osama D., 2011. "Inflation variability between central bank's preferences and the structure of the economy: A note," Economic Modelling, Elsevier, vol. 28(1), pages 630-636.
    2. Svensson, Lars E O, 2009. "Transparency under Flexible Inflation Targeting: Experiences and Challenges," CEPR Discussion Papers 7213, C.E.P.R. Discussion Papers.
    3. Bedri Kamil Onur Tas, 2007. "Inflation Targeting as a Signalling Mechanism," Working Papers 0701, TOBB University of Economics and Technology, Department of Economics.

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