Defining Inflation Targets, the Policy Horizon and the Output-Inflation Tradeoff

Jose De Gregorio

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper shows the equivalence between different approaches to defining a central bank’s inflation objective. Defining a range and the percentage of time that inflation is expected to lie within that range is the same as defining a target for projected inflation within a given horizon. Both these definitions are in turn similar to defining the target in terms of the expected value and desired variance of inflation. All these definitions are connected by the actual process of inflation. A more volatile or persistent inflation increases the policy horizon. The paper also presents evidence on how inflation targets are actually defined in many countries and compares these stated targets with that implied by the actual process of inflation. To interpret these results, the paper presents a simple model, generalized in the appendices, to show how the central bank’s tolerance of deviations from the target, as well as the policy horizon, depend on the cost of output deviations from full employment, and on the slope and degree of backward-lookingness of the Phillips curve.

Date: 2007-03
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:415

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