Abstract
This paper relates the central bank preferences to the quality of its forecasts and to the impact on the economy of a cost-push shock. The framework is a Markov jump-linear-quadratic new Keynesian model, where the central bank searches for the optimal policy in presence of uncertainty on some basic structural parameters. Comparing CPI and domestic inflation targeting, the paper shows that the latter implies considerably less variability in the distribution forecast of the economic dynamics. In particular, the variability of the interest rates distribution forecast is much larger with CPI inflation targeting. Furthermore, domestic inflation targeting stands out for much less sensitiveness to interest rate smoothing, as well as for resulting in less economy-wide perturbation after a cost-push shocks.

See the paper to accompany this seminar