New comment: “Comment on Jeffrey Frankel, ‘Commodity Prices and Monetary Policy’,” in Campbell, John Y. (ed.), Asset Prices and Monetary Policy, University of Chicago Press, 2008.
Author Archives: admin
New publication: “Time Consistency of Fiscal and Monetary Policy: A Solution”
New publication: “Time Consistency of Fiscal and Monetary Policy: A Solution” (with Mats Persson and Torsten Persson, Institute for International Economic Studies), Econometrica 74 (2006) 193-212.
New publication: “Social Value of Public Information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con”
New publication: “Social Value of Public Information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con,” American Economic Review 96 (2006) 448-452.
New revision: “Monetary Policy with Model Uncertainty: Distribution Forecast Targeting”
New revision: “Monetary Policy with Model Uncertainty: Distribution Forecast Targeting” (with Noah Williams, Princeton University), September 2005.
New presentation: “Monetary Policy and Central Bank Communication,” at the conference “ECB and Its Watchers”
New presentation: “Monetary Policy and Central Bank Communication,” at the conference “ECB and Its Watchers,” Frankfurt, June 3, 2005.
New discussion: “Discussion of Faruqee, Laxton, Muir, and Pesenti, ‘Smooth Landing or Crash? Model-based Scenarios of Global Current Account Rebalancing'”
New discussion: “Discussion of Faruqee, Laxton, Muir, and Pesenti, ‘Smooth Landing or Crash? Model-based Scenarios of Global Current Account Rebalancing’,” presented at the NBER Conference on G7 Current Account Imbalances, Newport, RI, June 2005.
Monetary Policy with Judgment: Forecast Targeting
“Monetary Policy with Judgment: Forecast Targeting,” International Journal of Central Banking 1(1) (2005) 1-54, paper, online appendix.
First draft: June 2004
Published: May 2005
Abstract
“Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.
JEL Classification: E42, E52, E58
Keywords: Inflation targeting, optimal monetary policy, forecasts.
New publication: “Monetary Policy with Judgment: Forecast Targeting”
New publication: “Monetary Policy with Judgment: Forecast Targeting,” International Journal of Central Banking, premier issue, May 2005.
New publication: “Optimal Policy Projections”
New publication: “Optimal Policy Projections” (with Robert J. Tetlow, Federal Reserve Board), International Journal of Central Banking 1(3) (2005) 177-207.
New publication: “Targeting Rules vs. Instrument Rules for Monetary Policy: What Is Wrong with McCallum and Nelson?”
New publication: “Targeting Rules vs. Instrument Rules for Monetary Policy: What Is Wrong with McCallum and Nelson?” Federal Reserve Bank of St. Louis Review 87 (2005) 613-626.
New briefing paper: “Oil Prices and ECB Monetary Policy”
New briefing paper: “Oil Prices and ECB Monetary Policy,” January 2005.
New comment: “Comment on Brock and Durlauf, ‘Local Robustness Analysis: Theory and Applications'”
New comment: “Comment on Brock and Durlauf, ‘Local Robustness Analysis: Theory and Applications’,” January 2005.
New speech by Ben Bernanke, “The Logic of Monetary Policy”
New speech by Ben Bernanke, “The Logic of Monetary Policy,” Federal Reserve Board, December 2004, discusses forecast targeting (called “forecast-based policies”) and simple instrument rules (called “simple feedback policies”) with reference to my paper “Monetary Policy with Judgment: Forecast Targeting“.
New comment: “Comments on Bernanke, Reinhart, and Sack, ‘An Empirical Assessment of Monetary Policy Alternatives at the Zero Bound”
New comment: “Comments on Bernanke, Reinhart, and Sack, ‘An Empirical Assessment of Monetary Policy Alternatives at the Zero Bound,” Revised November 2004.
New paper: “Monetary Policy with Judgment: Forecast Targeting”
New paper: “Monetary Policy with Judgment: Forecast Targeting,” September 2004.