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What horizon for targeting inflation?

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Abstract

We investigate optimal horizons for targeting inflation in response to different shocks and their properties. Our analysis is based on a well specified macroeconometric model of Norway. We find that optimal horizons are highly shock-specific and do not increase with concern for output and/or interest rate fluctuations beyond some shock-specific levels. Optimal horizons increase with the degree of persistence in shocks while they are not affected by the size of a shock unless the central bank is averse to interest rate volatility. In the face of multiple shocks, however, sizes as well as signs of shocks become important for optimal horizons even when the central bank is not averse to interest rate volatility. This is because shocks of different signs and sizes may amplify or outweigh each others’ effects.

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Authors and Affiliations

  1. Research Department, Norges Bank, P.O. Box 1179, Sentrum, 0107, Oslo, Norway

    Q. Farooq Akram

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  1. Q. Farooq Akram
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Correspondence to Q. Farooq Akram.

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The views expressed in this paper are those of the author and should not be interpreted as reflecting those of Norges Bank (the central bank of Norway).

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Akram, Q.F. What horizon for targeting inflation?. Empir Econ 39, 675–702 (2010). https://doi.org/10.1007/s00181-009-0330-6

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  • DOI: https://doi.org/10.1007/s00181-009-0330-6

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