Strict and Flexible Inflation Forecast Targets: An Empirical Investigation

HKIMR Working Paper No.20/2009

40 Pages Posted: 8 Jun 2009

See all articles by Glenn Otto

Glenn Otto

UNSW Australia Business School, School of Economics

Graham M. Voss

University of Victoria - Department of Economics

Date Written: May 25, 2009

Abstract

We examine whether standard theoretical models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term.

For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting.

JEL Classification: E31, E58

Suggested Citation

Otto, Glenn and Voss, Graham M., Strict and Flexible Inflation Forecast Targets: An Empirical Investigation (May 25, 2009). HKIMR Working Paper No.20/2009. Available at SSRN: https://ssrn.com/abstract=1413654 or http://dx.doi.org/10.2139/ssrn.1413654

Glenn Otto

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Graham M. Voss (Contact Author)

University of Victoria - Department of Economics ( email )

Victoria V8W Y2Y, BC
Canada

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