Evaluating Inflation Targeting Using a Macroeconometric Model

Ray Fair ()

No 1570, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper uses a structurally estimated macroeconometric model, denoted the MC model, to evaluate inflation targeting in the United States. Various interest rate rules are tried with differing weights on inflation and output, and various optimal control problems are solved using differing weights on inflation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to inflation targeting, especially for price shocks, 2) price-level targeting is dominated by inflation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on inflation and unemployment in a loss function, 4) the estimated interest rate rule does a fairly good job at lowering variability, and 5) considerable economic variability is left after the Fed has done its best. Overall, the results suggest that the Fed should continue to behave as it has in the past.

Keywords: Inflation targeting; Interest rate rules; Optimal control (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2006-06, Revised 2007-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: CFP 1570.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in The Open-Access, Open-Assessment E-Journal (2007-8)

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