Targeting Inflation by Constant-Interest-Rate Forecasts

Kai Leitemo

Journal of Money, Credit and Banking, 2003, vol. 35, issue 4, 609-26

Abstract: This paper reviews the concept of constant-interest-rate inflation forecast (CIR) targeting. It stresses the time-inconsistent nature of CIR targeting and provides a new method for constructing CIR forecasts consistently in the context of models with forward-looking variables. A dynamic New Keynesian model with forward-looking price setting is used as an illustration, suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities' objective to smooth interest rate movements, as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:35:y:2003:i:4:p:609-26

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