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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2017:2:
How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden

Fredrik N. G. Andersson () and Lars Jonung ()

Abstract: Should an inflation-targeting central bank have an explicit tolerance band around its inflation target? This paper provides an answer derived from the Swedish experience. The Riksbank is exceptional in the sense that it first adopted and later abolished an explicit band and is currently considering bringing it back. We conclude that the band should be explicit for several reasons. Most important, an inflation-targeting central bank should be open and transparent to the public regarding its actual ability to control inflation. We discuss how a numerical measure of the proper width of the band can be constructed to foster communication and credibility.

Keywords: inflation targeting; tolerance band; tolerance interval; monetary policy; the Riksbank; Sweden; (follow links to similar papers)

JEL-Codes: E30; E31; E58; (follow links to similar papers)

22 pages, February 13, 2017

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