DP4229 | Implementing Optimal Policy Through Inflation-Forecast Targeting

Publication Date

23/02/2004

JEL Code(s)

Keyword(s)

Programme Area(s)

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.