Central Bank Inflation Targeting

This chapter summarizes the papers presented at a conference on Central Bank Inflation Targeting held March 6–7, 1998, under the joint sponsorship of the Federal Reserve Bank of San Francisco and Stanford University’s Center for Economic Policy Research. The Rudebusch-Svensson paper uses a small empirical model of the US economy to examine the performance of policy rules that are consistent with a policy regime of inflation targeting. The McCallum-Nelson paper provides a different example of the type of small, econometrically estimated model that can be used to investigate monetary policy questions. The policy rules analyzed are “inflation-forecast-based” rules. According to this class of rules, the central bank raises short-term interest rates whenever the rule-consistent inflation forecast is above the target for inflation. Estimating the policy rule followed by the Banks of England, France, and Italy is complicated by their participation in the European Exchange Rate Mechanism.