Controlling Inflation in Euroland
For the sake of credibility the ECB has to commit to a clear policy strategy - a direct inflation target or an intermediate monetary target. We offer some information on the scale of control and indicator problems associated with both strategies. We estimate the links between monetary policy actions and inflation in dynamic linear models with the Kalman filter. Using European M3 that the ECB has published recently, we find that the overall control problems involved in targeting money are larger than for direct inflation targets.
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