EVALUATING INFLATION TARGETING USING A MACROECONOMETRIC MODEL By

This paper uses a structurally estimatedmacroeconometricmodel, denoted the MC model, to evaluate in ation targeting in the United States. Various interest rate rules are tried with differing weights on in ation and output, and various optimal control problems are solved using differing weights on in ation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to in ation targeting, especially for price shocks, 2) price-level targeting is dominated by in ation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on in ation and unemployment in a loss function, 4) the estimated interest rate rule does a fairly good job at lowering variability, and 5) considerable economic variability is left after the Fed has done its best. Overall, the results suggest that the Fed should continue to behave as it has in the past.