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.