DP4229 Implementing Optimal Policy Through Inflation-Forecast Targeting
Author(s): | Lars E.O. Svensson, Michael Woodford |
Publication Date: | February 2004 |
Keyword(s): | commitment, discretion, inflation targeting |
JEL(s): | E42, E52, E58 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=4229 |
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.