Prague Economic Papers 2006, 15(4):300-314 | DOI: 10.18267/j.pep.290

Inflation Targeting: To Forecast or To Simulate?

Michal Skořepa¹, Viktor Kotlán²

¹ Czech National Bank, Na Příkopě 28, CZ - 115 03, Prague 1, and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, CZ - 110 00, Prague 1 (m.sko@seznam.cz)

² Česká spořitelna, a.s., Na Perštýně 1, CZ - 113 98 Prague 1, and VŠB - Technical University, Sokolská 33, CZ - 120 01 Ostrava 1

Perhaps the most notable development in the area of monetary policy over the last decade is the growing popularity of inflation targeting. This regime is based to a great extent on communication and, more specifically, on using and communicating assessments of future inflation. The central banking literature, however, devotes surprisingly little attention to some important issues connected with such assessments. There are some non-trivial choices that need to be made regarding future inflation assessments on three distinct levels: construction, decision making and communication. One of the most important choices relates to the treatment of central bank's behaviour within the assessment. We differentiate between forecast and simulation as two basic ways of assessing future inflation and we discuss the pros and cons of using the two ways of assessing future inflation on the three above-mentioned levels.

Keywords: monetary policy, inflation targeting, forecast, simulation, projection, communication, decision making

JEL classification: E52, E58

Published: January 1, 2006  Show citation