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Optimal Inflation Targeting: Further Developments of Inflation Targeting

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Author Info
Lars Svensson

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Abstract

The introduction of inflation targeting has led to major progress in practical monetary policy. Nevertheless, inflation-targeting central banks can make substantial additional progress by being more specific, systematic, and transparent about their operational objectives (in the form of using an explicit intertemporal loss function), their forecasts (in the form of deciding on optimal projections of the instrument rate and the target variables), and their communication (in the form of announcing optimal projections of the instrument rate and target variables). Furthermore, progress can be made by incorporating central-bank judgment and model uncertainty in a systematic way in the forecasting and decision process. In particular, incorporating model uncertainty allows the central bank to do more general “distribution forecast targeting” rather than the more restrictive “mean forecast targeting” under the assumption of approximate certainty equivalence.

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Publisher Info
Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 403.

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Date of creation: Dec 2006
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Handle: RePEc:chb:bcchwp:403

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Jansson, Per & Vredin, Anders, 2003. "Forecast-Based Monetary Policy: The Case of Sweden," International Finance, Blackwell Publishing, vol. 6(3), pages 349-80, Winter. [Downloadable!] (restricted)
  2. Lars Svensson & Noah Williams, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," NBER Working Papers 11733, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Jeffery D. Amato & Stephen Morris & Hyun Song Shin, 2002. "Communication and Monetary Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 18(4), pages 495-503.
    Other versions:
  4. Mervyn King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 25-52. [Downloadable!]
  5. Jeffery Amato & Hyun Song Shin, 2003. "Public and Private Information in Monetary Policy Models," Levine's Bibliography 666156000000000092, UCLA Department of Economics. [Downloadable!]
  6. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. Ruge-Murcia, Francisco J, 2003. " Inflation Targeting under Asymmetric Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 763-85, October.
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  8. Laurence H. Meyer, 2004. "Practical problems and obstacles to inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 151-160. [Downloadable!]
  9. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements. [Downloadable!]
  10. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Charles Goodhart & Margaret Bray, 2002. "You Might as Well be Hung for a Sheep as a Lamb: The Loss Function of an Agent," FMG Discussion Papers dp418, Financial Markets Group. [Downloadable!] (restricted)
  12. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 117-144. [Downloadable!]
  13. Seppo Honkapohja & Kaushik Mitra, 2003. "Performance of Inflation Targeting Based On Constant Interest Rate Projections," CFS Working Paper Series 2003/39, Center for Financial Studies. [Downloadable!]
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  14. Lars O. Svensson & Robert J. Tetlow, 2005. "Optimal Policy Projections," NBER Working Papers 11392, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December. [Downloadable!]
  16. Alan S. Blinder, 2006. "Monetary Policy Today: Sixteen Questions and about Twelve Answers," Working Papers 73, Princeton University, Department of Economics, Center for Economic Policy Studies.. [Downloadable!]
  17. Lars E.O. Svensson, 2003. "Optimal Policy with Low-Probability Extreme Events," NBER Working Papers 10196, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(3), pages 337-61, September. [Downloadable!] (restricted)
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  19. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
  20. Svensson, Lars E O & Woodford, Michael, 2004. "Implementing Optimal Policy Through Inflation-Forecast Targeting," CEPR Discussion Papers 4229, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  21. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2002-2), pages 1-62. [Downloadable!]
  22. Eric Leeper, 2003. "An "Inflation Reports" Report," NBER Working Papers 10089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1135-1149, September. [Downloadable!] (restricted)
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  24. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Papers in Applied Economic Theory 2005-19, Federal Reserve Bank of San Francisco. [Downloadable!]
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  25. Charles A.E. Goodhart, 2001. "Monetary transmission lags and the formulation of the policy decision on interest rates," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 165-186. [Downloadable!]
  26. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," International Finance Discussion Papers 807, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  27. Mervyn King, 1996. "How should central banks reduce inflation? conceptual issues," Proceedings, Federal Reserve Bank of Kansas City, pages 53-91. [Downloadable!]
  28. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics. [Downloadable!]
  29. Nessén, Marianne & Vestin, David, 2000. "Average Inflation Targeting," Working Paper Series 119, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Schabert, Andreas & van Wijnbergen, Sweder, 2006. "Debt, Deficits and Destabilizing Monetary Policy in Open Economies," CEPR Discussion Papers 5590, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Javier Gómez Pineda, . "La Política Monetaria en Colombia," Borradores de Economia 394, Banco de la Republica de Colombia. [Downloadable!]
  3. Buiter, Willem H, 2006. "How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and Central Bank Independence," CEPR Discussion Papers 5772, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Bedri Kamil Onur Tas, 2007. "Inflation Targeting as a Signalling Mechanism," Working Papers 0701, TOBB University of Economics and Technology, Department of Economics. [Downloadable!]
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