Inflation Tarageting and Mainstream

New classical macroeconomics and rational expectations hypothesis can be applied to give account of how and why inflation targeting works. As it is well known, expectations of firms (or, accurately, the subjective probability distribution of outcomes) will be distributed around the prediction of the theory itself (in other words, the objective probability distribution of those outcomes) for the same information set. So, rational agents expect an outcome the emergence of which is the most probable. However, the success of specifying the relevant model is limited, and the full and perfect knowledge of a given macroeconomic system can be regarded as a comfortable presumption at best. Knowledge of the relevant model is not feasible, even if high-level econometrical techniques are accessible or an adequate identification of the relevant explanatory variables is performed. So, the biasedness of estimations is not independent of the quantity and quality of information to which the modeller has access. In other words, estimations are asymptotically unbiased with respect to the exploited information.

Consistency can be interpreted similarly. On the basis of asymptotical unbiasedness, a moderated version of the rational expectations hypothesis can be suggested in which familiarity with the theoretical parameters is not a requirement for the relevant model. An agent (e.g. the central bank) with access to information along with high-level methodological skills, which are satisfactory in quantitative and qualitative terms alike, will be able to specify a quasi-relevant model (by increasing the quantity of information processed it will be capable of reducing biasedness) describing a specific macroeconomic system, and the more focal its position, the stronger the likelihood to make other agents accept it. Agents will decide to adjust their expectations to the outputs of the (quasi) relevant model. In this way, individual expectations become unbiased as much as possible, albeit against a background of considerable passivity. According to some researches, this is the theoretical background of the functionality of inflation targeting regimes.

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