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Open-Economy Inflation- Forecast Targeting by Kai Leitemo is a Economics, Econometrics and Finance article available to read on EtoBox.

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## Abstract We study simple inflation-forecast targeting in an open-economy setting. Simple inflation-forecast targeting implies setting an interest rate which, if kept unchanged throughout the forecast-targeting horizon, produces a conditional inflation forecast equal to the inflation target at the end of the horizon.We find that the optimal forecast-targeting horizon is relatively short (one year). A longer horizon does not consistently contribute to improved output stability, indeed it increases exchange rate variability and traded sector variability. The targeting procedure is substantially inferior to the optimal pre-commitment policy. Moreover, the targeting procedure does not necessarily determine the rational-expectations equilibrium and is subject to time inconsistency.

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Author

Kai Leitemo

Publisher

Walter de Gruyter GmbH

Published

2006

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)