Discussion paper

DP4229 Implementing Optimal Policy Through Inflation-Forecast Targeting

We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinacy of equilibrium, so as to reproduce a socially optimal equilibrium. We also evaluate these variants in terms of the transparency of the connection with the ultimate policy goals and the robustness to model perturbations. A suitably designed inflation-forecast targeting rule can achieve the social optimum and at the same time have a more transparent connection to policy goals and be more robust than competing instrument rules.

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Citation

Svensson, L and M Woodford (2004), ‘DP4229 Implementing Optimal Policy Through Inflation-Forecast Targeting‘, CEPR Discussion Paper No. 4229. CEPR Press, Paris & London. https://cepr.org/publications/dp4229