INFLATION TARGETING AND THE FULL EMPLOYMENT OBJECTIVE

Abstract

This paper shows the equivalence between various ways of stating the inflation objective. Defining a target range and the percentage of the time it is hoped to fall within its borders is tantamount to defining a target for projected inflation over a given horizon. Both versions are similar to defining the goal in terms of expected value and the desired variance for the inflationary trend. The paper also shows that the tolerance to inflation deviations from the target—directly associated to the policy horizon—depends on the costs of inflation deviating from the target as well as on the deviations of output from its full-employment potential. Therefore, stating the target as a function of an inflation objective does not overlook the importance of unemployment or the output gap in monetary policy decisions.