Inflation targeting: Some extensions

Previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks, consequences of model un certainty, and effects of interest rate smoothing and stabilization. Model uncertainty, output stabilization, and interest rate stabilization or smoot hing all call for a more gradual adjustment of the conditional inflation fo recast toward the inflation target. The conditional inflation forecast is t he natural intermediate target during inflation targeting. The optimal way of reacting to shocks is hence to check how they affect the inflation forec ast and then take the appropriate action. JEL classification: E42; E52; E58 .