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Open-economy Inflation Targeting Policies and Forecast Accuracy

  • Alessandro Flamini


    (Department of Economics and Management, University of Pavia)

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.

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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 020.

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Length: 31 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:pav:demwpp:020
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