By Ben S. Bernanke
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Extra info for The Inflation-Targeting Debate
Our task in this paper is to consider to what extent various alternative forms of inflation targeting can avoid stabilization bias, incorporate history dependence of the proper sort, and result in determinacy of the equilibrium. 2 Monetary Policy Rules and Approaches to Policy Implementation Since we will discuss the details of alternative decision frameworks for monetary policy, it is practical to have a consistent classification of such decision frameworks. ” “Targeting” is minimizing such a loss function.
Under discretionary optimization, however, it will not, as the central bank will reoptimize afresh at the later date and care nothing about past conditions that no longer constrain what it is possible for it to achieve at that date. This problem can exist, and generally does, even when the output-gap target is consistent with steady inflation at the inflation target so that there is no average inflation bias. As Woodford (1999a) stresses, the suboptimal responses to shocks characteristic of discretionary optimization also characterize any decision procedure for monetary policy that is purely forward looking.
As a result of this decision lag, the first-order condition for “voluntary” price changes is the same as in the simpler case but conditioned upon an earlier information set. This has the consequence that, as is often assumed, monetary policy changes will have no eﬀect upon inflation within the period in which the change first becomes public. 13 We allow for the existence of a “surprise” component of inflation in order to avoid the counterfactual implication that inflation is known with perfect certainty one period in advance.