Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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 ()
Additional contact information
Fredrik N. G. Andersson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Lars Jonung: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: E30; E31; E58

22 pages, February 13, 2017

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