LEO. Svensson/ European Economic Review 46(2002)771-780 to different models. in the that they perform reasonably well (in terms of (2.2)) in simulations with different models and rarely result in very bad outcomes(although these simulations have disregarded the important role of central-bank "judgment",to be discussed below) The disadvantages are: (1) The rule will not result in an optimal outcome, for sev eral reasons. For instance, it responds only to a small subset of the information about the economy available to the central bank, and it only imperfectly allows for"history dependence".*(2)More specifically, because of the simplicity of the rule, there will be many situations when good judgment calls for deviations from the rule. Indeed, Taylor (1993) to a large extent discusses sensible discretionary departures from the rule. But then the rule is incomplete, since it provides no rule for departures from the rule. (3) In spite of all the research and discussion of the Taylor rule, no central bank has made a commitment to follow it. Instead of mechanical instrument-rate decision inflation-targeting central banks have set up very elaborate decision-making processes, re huge amounts of information are collected and processed, and conditional fore casts of inflation and output or the output-gap are constructed and contemplated, before an instrument-rate decision is made (Brash, 2001; Svensson, 2001a).(4) Empirical estimates of Taylor-type reaction functions show that they at most explain 3 of the empirical instrument-rate changes ( Judd and Rudebusch, 1998). Thus, central banks in practice deviate substantially from such a reaction function. Furt rmore. a empirical fit would still be consistent with the reaction function being the endo- genous reduced-form outcome of a complex central-bank decision process rather than a commitment that is the beginning and the end of the process 2.2. Commitment to a targeting I find a commitment to a simple instrument rule unsuitable both as description of and prescription for inflation targeting. Instead, I believe inflation targeting is better described and prescribed as a commitment to a"targeting rule". I find it practical to distinguish between"general"and"specific"targeting rules. A general targeting ru specifies the objectives for monetary policy in an operational way, that is, specifies operational loss function. A commitment to a general targeting rule is hence a com- mitment to minimize such a loss function. Such a commitment is often taken as giv by researchers modeling optimal policy, for instance in the Kydland-Prescott-Barro- Gordon-Rogoff tradition. However, in practical monetary policy, making the objectives operational and explicit, is a large step compared to previous ad hoc policies. Getting the objectives straight and creating an institutional commitment to those objectives are rucial contributions of inflation target 4 Optimal instru dence” in the ten rules hay in forward-lookins lagged shocks, "history depen- vension a Svensson(1997,1999,200 (1998, 2000), Clarida et al. (1999)and Svensson and Woodford(1999).L.E.O. Svensson / European Economic Review 46 (2002) 771 – 780 775 to diNerent models, in the sense that they perform reasonably well (in terms of (2.2)) in simulations with diNerent models and rarely result in very bad outcomes (although these simulations have disregarded the important role of central-bank “judgment”, to be discussed below). The disadvantages are: (1) The rule will not result in an optimal outcome, for sev￾eral reasons. For instance, it responds only to a small subset of the information about the economy available to the central bank, and it only imperfectly allows for “history dependence”. 4 (2) More speci@cally, because of the simplicity of the rule, there will be many situations when good judgment calls for deviations from the rule. Indeed, Taylor (1993) to a large extent discusses sensible discretionary departures from the rule. But then the rule is incomplete, since it provides no rule for departures from the rule. (3) In spite of all the research and discussion of the Taylor rule, no central bank has made a commitment to follow it. Instead of mechanical instrument-rate decisions, in ation-targeting central banks have set up very elaborate decision-making processes, where huge amounts of information are collected and processed, and conditional fore￾casts of in ation and output or the output-gap are constructed and contemplated, before an instrument-rate decision is made (Brash, 2001; Svensson, 2001a). (4) Empirical estimates of Taylor-type reaction functions show that they at most explain 2 3 of the empirical instrument-rate changes (Judd and Rudebusch, 1998). Thus, central banks in practice deviate substantially from such a reaction function. Furthermore, a good empirical @t would still be consistent with the reaction function being the endo￾genous reduced-form outcome of a complex central-bank decision process rather than a commitment that is the beginning and the end of the process. 2.2. Commitment to a targeting rule I @nd a commitment to a simple instrument rule unsuitable both as description of and prescription for in ation targeting. Instead, I believe in ation targeting is better described and prescribed as a commitment to a “targeting rule”. 5 I @nd it practical to distinguish between “general” and “speci@c” targeting rules. A general targeting rule speci@es the objectives for monetary policy in an operational way, that is, speci@es an operational loss function. A commitment to a general targeting rule is hence a com￾mitment to minimize such a loss function. Such a commitment is often taken as given by researchers modeling optimal policy, for instance in the Kydland–Prescott–Barro– Gordon–RogoN tradition. However, in practical monetary policy, making the objectives operational and explicit, is a large step compared to previous ad hoc policies. Getting the objectives straight and creating an institutional commitment to those objectives are crucial contributions of in ation targeting. 4 Optimal instrument rules in forward-looking models include responses to lagged shocks, “history depen￾dence” in the terminology of Woodford (1999) and Svensson and Woodford (1999). 5 Target(ing) rules have previously been discussed by Sims (1980), RogoN (1985), Walsh (1998), Svensson (1997, 1999, 2001b), Rudebusch and Svensson (1999), Cecchetti (1998, 2000), Clarida et al. (1999) and Svensson and Woodford (1999)