Inflation-Forecast Targeting: Applying the Principle of Transparency

Abstract

Many central banks in emerging and advanced economies have adopted an inflation-forecast targeting (IFT) approach to monetary policy, in order to successfully establish a stable, lowinflation environment. To support policy making, each has developed a structured system of forecasting and policy analysis appropriate to its needs. A common component is a modelbased forecast with an endogenous policy interest rate path. The approach is characterized, among other things, by transparent communications-some IFT central banks go so far as to publish their policy interest rate projection. Some elements of this regime, although a work still in progress, are worthy of consideration by central banks that have not yet officially adopted full-fledged inflation targeting.

Eurozone or national inflation projections: Which has greater impact on consumer expectations?

“…In the face of Eurozone disturbances, appropriate management of inflation expectations seems to be increasingly important and should involve looking for its dynamic sources and drivers. When the central bank operates under zero lower bound (ZLB), and when its policy is shaped by a deflation threat, a forecast that presents interest rates near the floor for a long enough period might help inflation to get back on track (Kevin Clinton et al, 2015).…”

Japan

“… See Clinton et al (2015).20 This discussion closely followsSvensson (2019) andArbatli et al (2016).21 WhileSvensson (2019) discusses an exogenous policy rate path,Clinton et al (2015) advocates for an endogenously determined policy rate path that is determined by a reaction function.22 Note that while the forecast is a key input into the policy decision, the process does not exclude individual Board members from incorporating their own judgment. ©International Monetary Fund.…”

Policy Conflicts and Inflation Targeting: The Role of Credit Markets

“…The forward-looking monetary policy would respond to inflation forecast(Clinton et al, 2015). Inflation forecast could be based on surveys, models, or markets(Faust and Wright, 2013;Bauer and Rudebusch, 2015; and Bauer and McCarty, 2015), while it could also be the central bank's forecast taking into account all available information(Svensson, 1997 and2017b).©International Monetary Fund.…”