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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
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0020.pdf
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    More about this item

    Keywords

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

    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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