Working Paper: NBER ID: w9421
Authors: Lars E. O. Svensson
Abstract: It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule, either a general targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for (the forecasts of) the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables. Targeting rules allow the use of judgment and extra-model information, are more robust and easier to verify than optimal instrument rules, and they can nevertheless bring the economy close to the socially optimal equilibrium.
Keywords: No keywords provided
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 |
|---|---|
| type of monetary policy rule (targeting rule) (E52) | effectiveness in stabilizing inflation and output (E63) |
| targeting rules (M38) | robustness and verifiability of monetary policy (E61) |
| central bank decision-making complexity (E58) | effectiveness of monetary policy (E52) |