Working Paper: NBER ID: w9747
Authors: Lars E.O. Svensson; Michael Woodford
Abstract: We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinancy 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.
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 |
|---|---|
| inflation-forecast targeting (E31) | avoid stabilization bias (C62) |
| design of the inflation-targeting framework (E61) | central bank's ability to respond effectively to economic fluctuations (E58) |
| history-dependence of policy (N40) | determinacy of equilibrium (C62) |
| discretionary optimization (C61) | suboptimal responses to shocks (E71) |
| history-dependence (N00) | effectiveness of monetary policy (E52) |
| well-designed inflation-forecast targeting rule (E61) | unique and stable equilibrium (C62) |
| design of the targeting rule (C90) | achievement of social optimality (D71) |