We extend the Svensson (1997a) inflation forecast targeting framework with a convex Phillips curve. We derive an asymmetric target rule, that implies a higher level of nominal interest rates than the Svensson (1997a) forward looking version of the reaction function popularised by Taylor (1993). Extending the analysis with uncertainty about the output gap, we find that uncertainty induces a further upward bias in nominal interest rates. Thus, the implications of uncertainty for optimal policy are the opposite of standard multiplier uncertainty analysis.
|Place of Publication||Tilburg|
|Number of pages||27|
|Publication status||Published - 1998|
|Name||CentER Discussion Paper|
- inflation targets
- stochastic control