The Role of Policy Rules in Inflation Targeting

This paper seeks to clarify the ways in which inflation targeting corresponds to a policy rule conceptually, and to assess the extent to which inflation targeters' policy can be described by policy rules in practice. Using central banks' inflation and output forecasts, the empirical analysis shows that simple forward-looking instrument rules provide a reasonably good characterization of interest rate setting by the inflation-targeting Reserve Bank of New Zealand and Sveriges Riksbank, as well as by the U.S. Federal Reserve. While explicit inflation targeters tend to react more strongly to their inflation forecasts than the Fed, none is an inflation nutter, and all appear to exercise a large degree of judgment in setting policy. Simple optimal targeting rules appear generally less informative than empirical instrument rules