Abstract

This paper reviews the concept of constant-interest-rate inflation forecast (CIR) targeting. It stresses the time-inconsistent nature of CIR targeting and provides a new method for constructing CIR forecasts consistently in the context of models with forward-looking variables. A dynamic New Keynesian model with forward-looking price setting is used as an illustration, suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities’ objective to smooth interest rate movements, as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 609-626
Launched on MUSE
2003-07-17
Open Access
No
Archive Status
Archived 2007
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