Inflation Targets and Policy Horizons

We use conditional forecasts from Canadian inflation over the inflation targeting period to estimate monetary policy horizons, defined as the period required for conditional forecasts of inflation to return to target. The conditional forecasts generate a set of policy horizons that tend to have median lengths longer than the typical two-year horizon identified by central banks. Further, the distribution of these forecasts is not unimodal, with policy horizons massed on shorter lengths of about one year and longer lengths of three or more years. The variation in the policy horizons, which are conditional on current economic conditions, is evidence of a form of flexibility in monetary policy. We also provide evidence of some instability in the underlying inflation models and associated policy horizons.