Monetary policy analysis and inflation targeting in a small open economy: A VAR approach

Empirical monetary policy research has increased in the last decade, possib ly because deregulation nd explicit monetary targets have made monetary pol icy issues more interesting. In particular, within the inflation targeting framework it has been argued that inflation forecasts can be used as optima l intermediate targets br monetary policy, and the development of empirical models that have good forecasting properties is therefore important. This paper shows that a VAR model with long-run restrictions, justified by econo mic theory, is useful for both forecasting inflation and for analysing othe r issues that are central to the conduct of monetary policy. Copyright (C) 2001 John Wiley & Sons, Ltd.