Econometric Inflation Targeting

Abstract

Inflation targeting requires inflation forecasts, yet most models in the literature are either theoretical or calibrated. The motivation for this paper is therefore threefold: We seek to test and implement an econometric model for forecasting inflation in Norway–one economy recently opting for formal inflation targeting rather than a managed nominal exchange rate. We also seek to quantify the relative importance of the different transmission mechanisms– with basis in empirical estimates rather than calibrated values. Finally, we want to focus on and exploit econometric issues required in the design and estimation of econometric models used for inflation forecasting and policy analysis.