Inflation-forecast targeting

“Inflation Targeting,” in Friedman, Benjamin M., and Michael Woodford, eds., Handbook of Monetary Economics, Volume 3b, chapter 22, Elsevier. PDFAbstract.

The chapter discusses the history, theory, practice, and future of inflation targeting.

“Evaluating Monetary Policy,”  in Koenig, Evan F., Robert Leeson, and George A. Kahn, eds., The Taylor Rule and the Transformation of Monetary Policy, Hoover Institution Press, 2012, p. 245-274. PDFAbstract.

The line: With a modified Taylor curve, the forecast Taylor curve, and plots of mean squared gaps showing the tradeoff between the variability of the inflation-gap and output-gap forecasts it is possible to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time.

“Anticipated Alternative Instrument-Rate Paths in Policy Simulations” (with Stefan Laséen, Sveriges Riksbank), revised May 2011.  Forthcoming in International Journal of Central BankingPDFAbstract.
The line: We show how to do policy simulations with alternative arbitrary instrument-rate paths that are anticipated rather than unanticipated as in the method of modest interventions of Leeper and Zha.

“Evaluating Monetary Policy,” speech at Uppsala University, March 13, 2009. EnglishSwedish.

The line: When evaluating a flexible inflation-targeting regime, it is not enough to simply compare the outcome for inflation with the inflation target; it is necessary to evaluate the central bank’s decisions primarily on the basis of the information that was available when the decisions were made (ex ante).

“Optimal Monetary Policy,” keynote lecture at the Workshop on Optimal Monetary Policy, Norges Bank, November 21-22, 2008, slides.

The line: Optimal monetary policy can in theory be seen as equivalent to choosing an optimal policy function, but it can in practice better be seen as choosing an optimal projection of the instrument rate, inflation, and resource utilization in a set of feasible projections so as to minimize an intertemporal loss functin corresponding to central-bank objectives.

“Optimal Monetary Policy in an Operational Medium-Sized DSGE Model” (with Malin Adolfson, Stefan Laséen, and Jesper Lindé, Sveriges Riksbank), July 2010,  Journal of Money, Credit and Banking, forthcoming. PDFAbstractTechnical AppendixLonger June 2009 version.

The line: We show how to construct optimal policy simulation in Ramses, the Riksbank’s open-economy medium-sized DSGE model for forecasting and policy analysis.  Optimal policy under commitment fits Riksbank past policy better than simple instrument rule without policy shock.

“What Have Economists Learned about Monetary Policy over the past 50 Years?,” in Herrman, Heinz, ed., Monetary Policy Over Fifty Years: Experiences and Lessons, Routledge, 2009. PDFPress release, September 2008.

The line: A personal view about the research on monetary policy that is most relevant to practical monetary policy, starting with Milton Friedman’s Presidential Address in December 1967.
“Inflation Targeting,” May 2007, in The New Palgrave Dictionary of Economics, 2nd edition, edited by Larry Blum and Steven Durlauf, forthcoming, PDF.

The line: Inflation targeting was introduced in New Zealand in 1990; has been very successful in terms of stabilizing both inflation and the real economy; has as of 2007 had been adopted by more than 20 industrialized and non-industrialized countries; and is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called ‘inflation-forecast targeting’, and a high degree of transparency and accountability.

“Bayesian and Adaptive Optimal Policy under Model Uncertainty” (with Noah Williams, University of Wisconsin), September 2007, PDFAbstract.

The line: Bayesian optimal policy (which includes both learning and experimentation) in a both general and tractable case of model uncertainty is compared to adaptive optimal policy (which includes learning but excludes experimentation), and the results indicate that optimal experimentation brings only modest gains above the learning under adaptive optimal policy.

“The Role of Science in Best-Practice Monetary Policy: In Honor of Otmar Issing,” presented at “Monetary Policy: A Journey from Theory to Practice,” an ECB Colloqium held in honor of Otmar Issing in Frankfurt, March 16-17, 2006, PDFAbstract.
The line: There is a considerable amount of science in current best-practice monetary policy, but a considerable amount of judgment is also needed., which judgment preferably should be used in a systematic and disciplined way.
“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, PDFAbstract.

The line: By publishing optimal projections of the instrument rate, inflation, and the output gap with uncertainty intervals, together with discussion, alternative scenarios, criteria for optimal projections (targeting rules), and cross-checking with alternative policy rules, Norges Bank (the central bank of Norway) has provided a model in transparent flexible inflation targeting for other central banks.

“The Riksbank Should Learn from Norway” (in Swedish), interview in Dagens Industri, January 14, 2006, PDF.

“Monetary Policy with Model Uncertainty: Distribution Forecast Targeting” (with Noah Williams, University of Wisconsin), May 2007, PDFAbstract and Matlab programs.

The line: A very flexible, powerful, and yet tractable framework for the analysis and determination of optimal monetary policy under  model uncertainty and certainty non-equivalence is introduced and shown to incorporate a large variety of different configurations of uncertainty and central-bank judgment.

“Optimal Inflation Targeting: Further Developments of Inflation Targeting,” in Mishkin, Frederic, and Klaus Schmidt-Hebbel (eds.) (2007), Monetary Policy under Inflation Targeting, Banco Central de Chile, PDFAbstract.
The line: Substantial progress can be made by inflation-targeting central banks by (1) employing an explicit intertemporal loss function, (2) making explicit decisions on optimal projection paths of the instrument rate, (3) publishing such projections, and (4) incorporating judgment and model uncertainty in a systematic way.

“Optimal Policy Projections” (with Robert J. Tetlow, Federal Reserve Board), August 2005, International Journal of Central Banking 1(3) (2005) 177-207, PDFAbstract.
The line: Optimal Policy Projections – a method to give advice to policymakers on optimal monetary policy, taking central-bank judgment into account – is demonstrated with the Fed’s FRB/US model and two Greenbook forecasts.
“Monetary Policy with Judgment: Forecast Targeting,” International Journal of Central Banking 1(1) (2005) 1-54, PDFAbstractAppendix.

The line: Monetary policy that uses central-bank judgment – information, knowledge, and views outside the scope of a particular model – may perform much better than monetary policy that disregards judgment and follows a simple instrument rule.

“Optimal Policy with Low-Probability Extreme Events,” in Macroeconomics, Monetary Policy, and Financial Stability – A Festschrift for Charles Freedman, Proceedings of a conference held by the Bank of Canada, Ottawa, June 2003, 79-104. PDFAbstract.

“Monetary Policy and Learning,” Federal Reserve Bank of Atlanta Economic Review, Third Quarter 2003, 11-16, PDF (109 KB).

“Implementing Optimal Policy through Inflation-Forecast Targeting,” (with Michael Woodford, Columbia University), in Bernanke, Ben S., and Michael Woodford, eds. (2005), The Inflation-Targeting Debate, University of Chicago Press, 19-83. PDFAbstract.
“What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules,” Version 3.1, January 2003, Journal of Economic Literature 41 (2003) 426-477, PDF (619 KB). Abstract.

“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, PDFAbstract.

The line: A response to McCallum and Nelson’s (2005) paper “Targeting Rules vs. Instrument Rules for Monetary Policy,” which criticizes my JEL 2003 article “What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules.”
A speech by Ben Bernanke, “The Logic of Monetary Policy,” Federal Reserve Board, December 2004, discusses these issue (forecast targeting/targeting rules are called “forecast-based policies” and simple instrument rules are called “simple feedback policies”).

An Independent Review of Monetary Policy and Institutions in Norway,” by Lars E.O. Svensson (chair) (Princeton University), Kjetil Houg (Alfred Berg), Haakon Solheim (Norwegian School of Management BI) and Erling Steigum (Norwegian School of Management BI), Norges Bank Watch 2002, Centre for Monetary Economics, Norwegian School of Management BI, September 2002.

“Monetary Policy and Real Stabilization,” September 2002, in Rethinking Stabilization Policy, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29-31, 2002, 261-312, PDFAbstract.

“The Inflation Forecast and the Loss Function,” in Paul Mizen, ed. (2003), Central Banking, Monetary Theory and Practice: Essays in Honour of Charles Goodhart, Volume I, Edward Elgar, 135-152. PDF (180 KB). Abstract.

“Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?” European Economic Review 46 (2002) 771-780, PDF (135KB). Abstract.
“Requiem for Forecast-Based Instrument Rules,” April 2001, PDF (149 KB). Abstract.
Discussion of McCallum, “Inflation Targeting and the Liquidity Trap,” FRBSF and SIEPR Conference on Asset Prices, Exchange Rates and Monetary Policy, Stanford University, March 2-3, 2001, overhead slides (PDF, 58KB).

“Independent Review of the Operation of Monetary Policy in New Zealand: Report to the Minister of Finance,” February 2001

“How Should Monetary Policy Be Conducted in an Era of Price Stability?” in New Challenges for Monetary Policy, a symposium sponsored by the Federal Reserve Bank of Kansas City, held at Jackson Hole, Wyoming, August 26-28, 1999 (IIES Seminar Paper No. 680, CEPR Discussion Paper No. 2342, NBER Working Paper No. 7516), PDF (0.4 MB). Abstract.

“Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability,” in Deutsche Bundesbank, ed. (2001), The Monetary Transmission Process: Recent Developments and Lessons for Europe, Palgrave, New York, 60-102. (CEPR Discussion Paper No. 2196, NBER Working Paper No. 7276), PDF (0.3 MB). Abstract.

“Policy Rules for Inflation Targeting” (with Glenn Rudebusch, Federal Reserve Bank of San Francisco), in John B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, 1999. IIES Seminar Paper No. 637, March 1998, (NBER Working Paper No. 6512),PDF (0.4 MB). Abstract.

“Inflation Targeting as a Monetary Policy Rule,” Journal of Monetary Economics 43 (1999) 607-654.

  • Working Paper version, presented at the Sveriges Riksbank-IIES Conference on Monetary Policy Rules, Stockholm, June 12-13, 1998. IIES Seminar Paper No. 646, August 1998 (CEPR Discussion Paper No. 1998, NBER Working Paper No. 6790), PDF (0.4 MB). Abstract.
  • Revised and shortened Journal version, December 1998, PDF (0.4 MB). Abstract
  • Corrections.

“Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,” European Economic Review 41 (1997) 1111-1146,  PDF (320 KB). Abstract.