Working paper No. 98
By Eric Schaling
This paper extends the Svensson (1997a) inflation forecast targeting framework with a convex Phillips curve. An asymmetric target rule is derived, which implies a higher level of nominal interest rates than the Svensson (1997a) forward-looking version of the reaction function popularised by Taylor (1993). Extending the analysis with uncertainty about the output gap, it is found that uncertainty induces a further upward bias in nominal interest rates.