Strict and Flexible Inflation Forecast Targets: An Empirical Investigation

Glenn Otto () and Graham Voss
Additional contact information
Glenn Otto: School of Economics, University of New South Wales, https://www.unsw.edu.au/business/our-schools/economics

No 902, Department Discussion Papers from Department of Economics, University of Victoria

Abstract: We examine whether models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term. For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting.

Keywords: Monetary policy; inflation; inflation targeting; central banks (search for similar items in EconPapers)
JEL-codes: E31 E58 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2009-06-16
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Note: ISSN 1914-2838
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Strict and Flexible Inflation Forecast Targets: An Empirical Investigation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicddp:0902

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