Working Paper: CEPR ID: DP3365
Authors: Lars E.O. Svensson
Abstract: This Paper argues that inflation-targeting central banks should announce explicit loss function with numerical relative weights on output-gap stabilization and use and announce optimal time-varying instrument-rate paths and corresponding inflation and output-gap forecasts. Simple voting procedures for forming the Monetary Policy Committee?s aggregate loss function and time-varying instrument-rate paths are suggested.Announcing an explicit loss function improves the transparency of inflation targeting and eliminates some misunderstandings of the meaning of ?flexible? inflation targeting. Using time-varying instrument-rate paths avoids a number of inconsistencies and other problems inherently associated with constant-interest-rate forecasts.
Keywords: Inflation targeting; Interest rate paths
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 |
|---|---|
| Explicit loss function (C29) | Improved transparency of inflation targeting (E52) |
| Time-varying interest rates (E43) | Reduction of inconsistencies in forecasts (C53) |
| Lack of clarity in objectives (L21) | Misinterpretations of policy (E65) |