Working Paper: CEPR ID: DP1511
Authors: Lars E. O. Svensson
Abstract: Inflation targeting is shown to imply inflation forecast targeting; the central bank?s inflation forecast becomes an explicit intermediate target. Inflation forecast targeting simplifies both implementation and monitoring of monetary policy. The weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target. Money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability. Commitment to ?target rules? may be better than commitment to ?instrument rules?.
Keywords: monetary policy regimes
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation targeting (E31) | inflation forecast targeting (E31) |
| inflation forecast targeting (E31) | improved transparency and accountability of monetary policy (E58) |
| weight on output stabilization (E63) | adjustment rate of the inflation forecast towards the target (E47) |
| inflation targeting (E31) | better management of inflation expectations (E31) |
| inflation targeting (E31) | reduced inflation bias associated with discretionary monetary policy (E52) |
| inflation targeting (E31) | enhanced credibility of monetary policy (E52) |
| inflation targeting (E31) | improved economic stability (E63) |