Lars E.O. Svensson
CEPR and NBER
Columbia University and NBER
First Draft: November 1999
Version 2.6: April 2003
In Bernanke, Ben S., and Michael Woodford, eds. (2005),
The Inflation-Targeting Debate, University of Chicago Press, 9-83.
We examine to what extent variants of inflation-forecast targeting can avoid stabilization bias, incorporate history-dependence, and achieve determinacy of equilibrium, so as to reproduce the socially optimal equilibrium under commitment. We also evaluate these variants in terms of their transparency and robustness. A suitably designed inflation-forecast targeting rule can achieve the social optimum and at the same time be both more transparent and more robust than competing instrument rules.
JEL Classification: E42, E52, E58
Keywords: Commitment, discretion, inflation targeting.