 Response to Seitz and Tödter, ‘How the P* Model Rationalizes Monetary Targeting: A Comment on Svensson’German Economic Review, 2001, vol. 2, issue 3, 309-312 Abstract: Seitz and T?dter argue, counter to Svensson, that the P* model provides a rationale for money‐growth targeting. In particular, they argue that ‘money growth targeting is a special form of inflation forecast targeting based on a “limited” information set. In contrast to “full information” inflation forecast targeting, money growth targeting is likely to be more robust under changing conditions of the real world‘. However, money‐growth targeting is better described as a special case of inflation targeting, namely when money growth is considered to be the only predictor of future inflation. But there is overwhelming empirical evidence that there are not only other, but also better, predictors of future inflation than money growth, which makes inflation‐forecast targeting superior to money‐growth targeting. Inflation‐forecast targeting is indeed more robust (in the sense of using available information and allowing judgemental adjustments in a flexible way) than monetary targeting. In particular, in the P* model, the real money gap is a better predictor of future inflation than money growth, as demonstrated theoretically by Svensson and empirically by Gerlach and Svensson (the empirical finding is also confirmed by Trecroci and Vega). Therefore, inflation‐forecast targeting is superior also within the P* model. Under `changing conditions of the real world’, for instance after the formation of a monetary union, money growth is likely to be particularly unreliable as a predictor of future inflation, making monetary targeting especially unsuitable and non‐robust. Date: 2001 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:germec:v:2:y:2001:i:3:p:309-312 Ordering information: This journal article can be ordered from Access Statistics for this article German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin More articles in German Economic Review from Verein für Socialpolitik Contact information at EDIRC. |
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