First draft: September 1996
This version: August 1998
Scandinavian Journal of Economics 101(3) (1999) 337-361.
Abstract
Previous analyses of the implementation of inflation targeting
are extended to monetary policy responses to different shocks,
consequences of model uncertainty, and effects of interest rate
smoothing and stabilization. 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. The optimal way of reacting to shocks is hence to
check how they affect the inflation forecast and then take the
appropriate action.
JEL classification: E42, E52, E58
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