Inflation Targeting Rules: History-Dependent or Forwarding-Looking?

Abstract

This paper discusses the optimal use of inflation forecasts in an inflation targeting setting with reaction and implementation lags. It distinguishes between the optimality of history-dependence versus forward-lookingness in monetary policymaking. It is shown that monetary policy strategy is inverted relative to private sector pricing behaviour: if private sector price setting is backward-looking, policy should be forward-looking, and vice versa.