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Strict and Flexible Inflation Forecast Targets: An Empirical Investigation

We examine whether models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term. For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting.

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Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 0902.

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Length: 48 pages
Date of creation: 16 Jun 2009
Date of revision:
Handle: RePEc:vic:vicddp:0902
Note: ISSN 1914-2838
Contact details of provider: Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2
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  1. repec:ucp:bknber:9780226044712 is not listed on IDEAS
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  20. Richard Dennis, 2003. "Inferring policy objectives from economic outcomes," Working Paper Series 2003-05, Federal Reserve Bank of San Francisco.
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  22. Lars E. O. Svensson, 2005. "Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 613-626.
  23. John Shea, 1996. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," NBER Technical Working Papers 0193, National Bureau of Economic Research, Inc.
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