Implementing Optimal Policy through Inflation-Forecast Targeting

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We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinancy of equilibrium, so as to reproduce a socially optimal equilibrium. We also evaluate these variants in terms of the transparency of the connection with the ultimate policy goals and the robustness to model perturbations. A suitably designed inflation-forecast targeting rule can achieve the social optimum and at the same time have a more transparent connection to policy goals and be more robust than competing instrument rules.

Published: Implementing Optimal Policy through Inflation-Forecast Targeting, Lars E.O. Svensson, Michael Woodford, in The Inflation-Targeting Debate (2005), University of Chicago Press

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