Working Paper: CEPR ID: DP1999
Authors: Glenn D. Rudebusch; Lars E. O. Svensson
Abstract: Policy rules that are consistent with inflation targeting are examined in a small macroeconometric model of the US economy. We compare the properties and outcomes of explicit 'instrument rules' as well as 'targeting rules'. The latter, which imply implicit instrument rules, may be closer to actual operating procedures of inflation-targeting central banks. We find that inflation forecasts are central for good policy rules under inflation targeting. Some simple instrument and targeting rules do remarkably well relative to the optimal rule; others, including some that are often used as representing inflation targeting, do less well.
Keywords: instrument rules; target rules
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation forecasts (E31) | good policy rules under inflation targeting (E61) |
| better forecasting (C53) | improved policy outcomes (D78) |
| central bank's ability to predict inflation accurately (E58) | policy decisions (D78) |
| policy decisions (D78) | economic stability (E63) |
| simple instrument and targeting rules (C36) | effectiveness in achieving inflation targets (E52) |
| less complex rules (L15) | better results than more sophisticated ones (C52) |
| some rules (Y20) | less effectiveness in inflation targeting (E52) |