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Open-economy Inflation Targeting Policies and Forecast Accuracy

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  • Alessandro Flamini

    () (Department of Economics and Management, University of Pavia)

Abstract

Forecast accuracy in macroeconomics is based on statistical techniques for extrapolating time series. This paper takes a new theoretical route studying the relation between forecast accuracy of macroeconomic variables and alternative monetary policies. Considering optimal policy with model-parameter uncertainty in a small open-economy, the paper shows that Domestic Inflation Targeting (DIT) leads to more forecast accuracy than Consumer Price index Inflation Targeting (CPIIT). Furthermore, forecast accuracy and policy aggressiveness turn out to be inversely related, and the trade-o¤ is more severe under CPIIT. These results are obtained in a New-Keynesian model measuring forecast accuracy by the volatility of simulated fan-charts.

Suggested Citation

  • Alessandro Flamini, 2012. "Open-economy Inflation Targeting Policies and Forecast Accuracy," DEM Working Papers Series 020, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:020
    as

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    File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0020.pdf
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    References listed on IDEAS

    as
    1. Pearce, Ivor F., 1974. "Matrices with dominating diagonal blocks," Journal of Economic Theory, Elsevier, vol. 9(2), pages 159-170, October.
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    5. Chipman, John S, 1969. "Factor Price Equalization and the Stolper-Samuelson Theorem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(3), pages 399-406, October.
    6. Uekawa, Yasuo & Kemp, Murray C. & Wegge, Leon L., 1973. "P- and PN-matrices, Minkowski- and Metzler- matrices, and generalizations of the Stolper- Samuelson and Samuelson-Rybczynski theorems," Journal of International Economics, Elsevier, vol. 3(1), pages 53-76, February.
    7. Peris, Josep E & Villar, Antonio, 1993. "Linear Joint-Production Models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(4), pages 735-742, October.
    8. Inada, Ken-ichi, 1971. "The Production Coefficient Matrix and the Stolper-Samuelson Condition," Econometrica, Econometric Society, vol. 39(2), pages 219-239, March.
    9. De Giuli, M.E., Magnani, U. & Moglia, P., 1994. "Some remarks on matrices with dominant diagonal," Pure Mathematics and Applications, Department of Mathematics, Corvinus University of Budapest, vol. 5(2), pages 141-151.
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    More about this item

    Keywords

    Multiplicative uncertainty; Markov jump linear quadratic systems; small open-economy; optimal monetary policy; inflation index.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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