Open-economy Inflation Targeting Policies and Forecast Accuracy

Forecast accuracy in macroeconomics is based on statistical techniques for extrapolating time series. This paper takes a new theoretical route studying the relation between forecast accuracy of macroeconomic variables and alternative monetary policies. Considering optimal policy with model-parameter uncertainty in a small open-economy, the paper shows that Domestic Inflation Targeting (DIT) leads to more forecast accuracy than Consumer Price index Inflation Targeting (CPIIT). Furthermore, forecast accuracy and policy aggressiveness turn out to be inversely related, and the trade-off is more severe under CPIIT. These results are obtained in a New-Keynesian model measuring forecast accuracy by the volatility of simulated fan-charts.