Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 625: Inflation Targeting: Some Extensions

Lars E.O. Svensson ()
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Lars E.O. Svensson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

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.

Keywords: inflation targeting; monetary policy; shocks; model uncertainty; interest rate smoothing; conditional inflation forecast

JEL-codes: E42; E52; E58

44 pages, October 31, 1997

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