Policy Rules for Inflation Targeting

Abstract

In this paper, we use a small empirical model of the U S .economy to examine the performance of policy rules that are consistent with a monetary policy regime of inflation targeting.In the real world, explicit inflation targeting is currently pursued in New Zealand, Canada, the United Kingdom, Sweden, Australia, and the Czech Republic.Inflation targeting in these countries is characterized by (1) a publicly announced numerical inflation target (either in the form of a target range, a point target, or a point target with a tolerance interval), ( 2 ) a framework for policy decisions that involves comparing an inflation forecast to the announced target, thus providing an "inflation-forecast targeting" regime for policy, where the forecast serves as an intermediate target (cf.Haldane 1998;King 1994; Svensson 1997a), and (3) a higher than average degree of transparency and accountability.'