## Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility

_IMF Working Papers, January 1, 2001_

## Source details

**Canonical URL:** [Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility](https://www.imf.org/en/publications/wp/issues/2016/12/30/inflation-targeting-with-nairu-uncertainty-and-endogenous-policy-credibility-3962)

## Other formats

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## Bibliographic details
- Authors: Peter Isard, Douglas Laxton, Ann-Charlotte Eliasson
- Published: January 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842418.001

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### Summary
- Stochastic simulations are employed to compare performance of monetary policy rules in linear and nonlinear variants of a small macro model with NAIRU uncertainity under different assumptions about the way inflation expectations are formed.
- Cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenuously.
- Policy credibility strengthens the case for forward-looking inflation forecast based rules relative to backward-looking Taylor rules.

### Methodology and Model Features
- Approach: Stochastic simulations.
- Model: Small macro model with linear and nonlinear variants.
- Key uncertainty: NAIRU uncertainity.
- Expectations frameworks compared:
  - Cases with credibility ignored or treated as exogenous.
  - Cases with credibility and inflation expectations responding endogenously.
- Policy rules evaluated:
  - Forward-looking inflation forecast based (IFB) rules.
  - Backward-looking Taylor rules.

### Principal Findings
- Endogenous policy credibility affects the relative performance of monetary policy rules.
- Strengthening policy credibility increases the relative attractiveness of forward-looking inflation forecast based rules over backward-looking Taylor rules.

### Policy Implications and Recommendations
- Consideration of endogenous credibility is important when assessing monetary policy rules.
- Forward-looking inflation forecast based rules gain support when policy credibility is accounted for endogenously.

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## Content in this bundle

- **Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibilty - WP/01/7**
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  - [Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibilty - WP/01/7 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2001/_wp0107.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/inflation-targeting-with-nairu-uncertainty-and-endogenous-policy-credibility-3962_