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"Evaluating Inflation Targeting Using a Macroeconometric
economics - The Open-Access, Open-Assessment E-Journal, 2007-8.
This paper uses a
structurally estimated macroeconometric model, denoted the MC model,
to evaluate inflation targeting in the United States.
Various interest rate rules are tried with differing weights on inflation and
output, and various optimal control problems are solved using differing
weights on inflation and output targets. Price-level targeting is
also considered. The results show that 1) there are output costs to
inflation targeting, especially for price shocks, 2) price-level
targeting is dominated by inflation targeting, 3) the estimated
interest rate rule of the Fed (in Table 4) is consistent with the Fed
placing equal weights on inflation and unemployment in a loss function,
4) the estimated interest rate rule
does a fairly good job at lowering variability, and 5)
considerable economic variability is left after the Fed has done its
best. Overall, the results suggest that the Fed should continue
to behave as it has in the past.