Evaluating Monetary Policy with Inflation Bands and Horizons

Davig, Troy; Foerster, Andrew

Journal Article

Evaluating Monetary Policy with Inflation Bands and Horizons

Abstract: Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.

Keywords: monetary policy; inflation targeting; central banking; Tolerance bands;