Strict inflation-forecast targeting in monetary policy could lead to economic instability.
The article discusses how central banks can use private-sector inflation forecasts to guide their monetary policies. By studying a model with slow price adjustments and economic shocks, the researchers found that strictly targeting inflation forecasts can lead to unstable outcomes. Policies based on general forecast rules can also result in unpredictable economic equilibria. The study concludes that while private forecasts can be helpful, central banks should rely on a structural model of the economy for making policy decisions.