Inflation Targeting and Output Growth

This paper evaluates the performance of two alternative policy rules, a forward-looking rule and a spontaneous adjustment rule, under alternative inflation targets, in terms of output losses in a macroeconomic model, using European Union data. The simulations suggest that forward-looking rules contribute to macroeconomic stability and monetary policy credibility, and that a positive inflation target, as opposed to zero inflation, leads to higher and less volatile output. These results are robust to changes in the specification of the model and time period. The same methodology applied to individual countries supports country-specific flexible inflation targeting.Inflation targeting;European Union;inflation, monetary policy, inflation rate, monetary authorities, inflation target, central bank, monetary economics, low inflation, price stability, inflation-targeting, inflation performance, monetary fund, nominal interest rate, actual inflation, real interest rate, rational expectations, lower inflation, real output, macroeconomic stability, monetary policy rules, optimal monetary policy, high inflation, real money, money supply, real wages, price level, inflation rates, rate of inflation, average inflation, inflation forecasts, monetary policy rule, monetary disturbance, forecasting inflation, percent inflation, monetary policy regimes, effects of inflation, monetary arrangements, discretionary monetary policy, demand for money, low rate of inflation, inflation dynamics, monetary policy regime, average inflation rate