Econometric inflation targeting

Abstract

Inflation targeting requires inflation forecasts, yet most models in the literature are either theoretical or calibrated. The motivation for this paper is therefore threefold: We seek to test and implement an econometric model for forecasting inflation in Norway-one economy recently opting for formal inflation targeting rather than a managed nominal exchange rate. We also seek to quantify the relative importance of the different transmission mechanismswith basis in empirical estimates rather than calibrated values. Finally, we want to focus on and exploit econometric issues required in the design and estimation of econometric models used for inflation forecasting and policy analysis.

Monetary policy and asset prices: to respond or not?

“…These interest rates depend on each other, short term interest rates (r) and foreign interest rates. Equations for these variables are very close to those documented in Bårdsen and Nymoen (2001) and Bårdsen et al (2003). Details about the dummy variables used in this paper can also be found in these two references.…”

“…In this section, we present the main equations of the model, which is largely an extension of the model in Bårdsen and Nymoen (2001) and Bårdsen et al (2003). For the sake of brevity, we have suppressed seasonal dummies and other dummies that are mainly related to changes in government policies, e.g.…”

What horizon for targeting inflation?

“…The model's statistical properties are documented in Akram and Eitrheim (2006) and further evidence on its properties can be found in e.g. Bårdsen et al (2003Bårdsen et al ( , 2005. We have also reestimated the model on an extended sample that ends in 2006q4…”

“…Our macroeconometric model of Norway is a version of the model developed in Bårdsen et al (2003Bårdsen et al ( , 2005) that has been documented and employed in several studies including Akram and Eitrheim (2006). 10 The model pertains to the Norwegian mainland economy, i.e.…”

“…That is, such central banks seem to accommodate concern for output stabilisation by choosing 1 The model used is a version of the model presented in Bårdsen et al (2003Bårdsen et al ( , 2005 which is documented in Akram and Eitrheim (2006). The model is part of the suite of models maintained by Norges Bank.…”