NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Inflation Targeting Rules

Marc P. Giannoni, Michael Woodford

NBER Working Paper No. 9939
Issued in September 2003
NBER Program(s):   EFG   ME

This paper characterizes optimal monetary policy for a range of alternative economic models in terms of a flexible inflation targeting rule, with a target criterion that depends on the model specification. It shows which forecast horizons should matter, and which variables besides inflation should be taken into account, for each specification. The likely quantitative significance of the various factors considered in the general discussion is then assessed by estimating a small, structural model of the U.S. monetary transmission mechanism with explicit optimizing foundations. An optimal policy rule is computed for the estimated model, and shown to correspond to a multi-stage inflation-forecast targeting procedure. The degree to which actual U.S. policy over the past two decades has conformed to the optimal target criteria is then considered.

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Published: Optimal Inflation-Targeting Rules , Marc Giannoni, Michael Woodford, in The Inflation-Targeting Debate (2005), University of Chicago Press (p. 93 - 172)

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