First draft: September 1996
This version: February 1998
Abstract
Previous analysis of the implementation of inflation targeting is
extended to monetary policy responses to different shocks,
consequences of model uncertainty, effects of interest rate
smoothing and stabilization, a comparison with nominal GDP
targeting, and implications of forward-looking behavior. Model
uncertainty, output stabilization, and interest rate
stabilization or smoothing all call for a more gradual adjustment
of the conditional inflation forecast toward the inflation
target. The conditional inflation forecast is the natural
intermediate target during inflation targeting.
JEL classification: E42, E52, E58
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