Contents

Most recent research on monetary-policy rules is restricted to consider a commitment to simple instrument rules, where the central-bank instrument is a simple function of available information about the economy, like the Taylor rule. However, a commitment to a simple instrument rule appears inadequate as a description of current monetary policy, especially in‡ation targeting. The latter can to a large extent be seen as in‡ation-forecast targeting, setting the instrument so that the corresponding conditional in‡ation forecast is consistent with the in‡ation target. It is argued, both from a descriptive and a prescriptive perspective, that in‡ation targeting is instead better understood as a commitment to a targeting rule, either a general targeting rule in the form of clear objectives for monetary policy or a speci…c targeting rule in the form of a condition for (the forecasts of) the target variables. Targeting rules allow the use of judgment and extra-model information, are more robust and easier to verify than optimal instrument rules, but they can nevertheless bring the economy close to the socially optimal equilibrium. These ideas are illustrated with the help of simple examples. Some recent defense of commitment to simple instrument rules and criticism of forward-looking monetary policy and targeting rules by McCallum and Woodford are also addressed