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Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation‐Output Variability Tradeoff
Author(s) -
Fackler James S.,
McMillin W. Douglas
Publication year - 2011
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-78.2.424
Subject(s) - inflation (cosmology) , econometrics , autoregressive model , economics , inflation targeting , monetary policy , macroeconomics , physics , theoretical physics
We suggest a new way of computing the inflation‐output variability tradeoff under inflation forecast targeting. Our approach is based on dynamic, stochastic simulations of the average inflation rate over a two‐year horizon using the moving average representation of a vector autoregressive (VAR) model. Using real‐time data over two samples, we estimate the inflation‐output variability tradeoff for the United States and show that it has shifted favorably over time. We analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time.