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Title: Implementing Optimal Policy Through Inflation-Forecast Targeting

Author(s): Lars E.O. Svensson and Michael Woodford

Publication Date: February 2004

Keyword(s): commitment, discretion and inflation targeting

Programme Area(s): International Macroeconomics

Abstract: We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinacy 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.

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Bibliographic Reference

Svensson, L and Woodford, M. 2004. 'Implementing Optimal Policy Through Inflation-Forecast Targeting'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4229