Open-Economy Inflation- Forecast Targeting

Kai Leitemo

German Economic Review, 2006, vol. 7, issue 1, 35-64

Abstract: We study simple inflation-forecast targeting in an open-economy setting. Simple inflation-forecast targeting implies setting an interest rate which, if kept unchanged throughout the forecast-targeting horizon, produces a conditional inflation forecast equal to the inflation target at the end of the horizon.We find that the optimal forecast-targeting horizon is relatively short (one year). A longer horizon does not consistently contribute to improved output stability, indeed it increases exchange rate variability and traded sector variability. The targeting procedure is substantially inferior to the optimal pre-commitment policy. Moreover, the targeting procedure does not necessarily determine the rational-expectations equilibrium and is subject to time inconsistency.

Keywords: Inflation targeting; forecast targeting; monetary policy; small open economy (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (5)

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DOI: 10.1111/j.1468-0475.2006.00146.x

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