TARGETING INFLATION - COMPARATIVE CONTROL EXERCISES ON MODELS OF THE UK ECONOMY

This article presents a comparative control exercise on four leading l arge-scale models of the UK economy. The target is the reduction of in flation; the policy instrument is the short-term interest rate. Within a standardized experimental design full numerical optimization or fee dback control rules are employed as appropriate. An important distinct ion between models is whether expectations, particularly concerning ex change rate behaviour, are treated in a backward-looking or forward-lo oking manner. Only the model that adopts the rational expectations hyp othesis comes close to satisfying the theoretical proposition that the inflation rate should be changeable without altering any real magnitu de.