Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 637: Policy Rules for Inflation Targeting

Lars E.O. Svensson () and Glenn Rudebusch ()
Additional contact information
Lars E.O. Svensson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Glenn Rudebusch: Federal Reserve Bank of San Francisco

Abstract: Policy rules that are consistent with inflation targeting are examined in a small macroeconometric model of the US economy. We compare the properties and outcomes of explicit 'instrument rules' as well as 'targeting rules'. The latter, which imply implicit instrument rules, may be closer to actual operating procedures of inflation-targeting central banks. We find that inflation forecasts are central for good policy rules under inflation targeting. Some simple instrument and targeting rules do remarkably well relative to the optimal rule; others, including some that are often used as representing inflation targeting, do less well.

Keywords: inflation targeting

JEL-codes: E52

51 pages, April 21, 1998

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