Another Look at the Inflation-Target Horizon

Don Coletti, Jack Selody and Carolyn Wilkins
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Carolyn Wilkins: Bank of Canada, http://www.bankofcanada.ca/

Bank of Canada Review, 2006, vol. 2006, issue Summer, pages 31-37

Abstract: The conduct of monetary policy within an inflation-targeting framework requires the establishment of an inflation-target horizon, which is the average time it takes inflation to return to the target. Policy-makers have an interest in communicating this horizon, since it is likely to help anchor inflation expectations. This article focuses on the determination of the appropriate policy horizon by reporting on two recent Bank of Canada studies. The evidence suggests that the current target horizon of six to eight quarters remains appropriate. It is important to note that the duration of the optimal inflation-target horizon varies widely, depending on the combination of shocks to the economy. In rare cases when the financial accelerator is triggered by a persistent shock, such as an asset-price bubble, it may be appropriate to take a longer view of the inflation-target horizon.

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