Inflation targeting and interest rate policy

The thesis contains a collection of papers on issues in inflation targeting and its implications for the way interest rates are set. In this respect, the first part deals with two largely positive issues: the effect of inflation forecast targeting on the term structure of interest rates and the implications of the well-established practice of interest rate stepping for several macroeconomic variables. Part II of the thesis takes a more normative approach and studies the socially optimal relative weight on output stabilisation. First, this is done in a sticky price model where the central banker faces uncertainty about potential output. Next, a model in which goods market prices are flexible is studied under the condition that the policymaker faces a non-line supply side constraint. The final part of the thesis studies the effect of opaqueness in the conduct of sterilised foreign exchange interventions.