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 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 comment: “Comment on Jeffrey Frankel, ‘Commodity Prices and Monetary Policy'”
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.
New publication: “The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example”
New publication: “The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example,” in Stability and Economic Growth: The Role of Central Banks, Banco de Mexico, 2006, 175-198.
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 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 briefing paper: “Oil Prices and ECB Monetary Policy”
New briefing paper: “Oil Prices and ECB Monetary Policy,” January 2005.
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 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 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.