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 (revision and update of speech on March 13, 2009). PDF. Abstract.
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 Banking. PDF. Abstract.
The line: We demonstrate a simple algorithm 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.
“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. PDF. Abstract. Technical Appendix. Longer 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.
“Transparency under Flexible Inflation Targeting: Experiences and Challenges,”
The line: Some personal views and reflections on transparency experiences and challenges following my first year as Deputy Governor at Sveriges Riksbank.
“Optimal Monetary Policy under Uncertainty: A Markov Jump-Linear-Quadratic Approach” (with Noah Williams, University of Wisconsin), Federal Reserve Bank of St. Louis Review 90(4), 2008, 275-293, PDF. Abstract.
The line: We use a Markov jump-linear-quadratic (MJLQ) approach to analyze how policy is affected by uncertainty, learning, and experimentation, finding that learning may have sizeable effects on losses and need not always be beneficial, whereas the experimentation component typically has little effect and can in some cases lead to attenuation of policy.
“Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov-Jump-Linear-Quadratic Approach” (with Noah Williams, University of Wisconsin), presented at the conference on Monetary Policy Under Uncertainty and Learning, Santiago, Chile, November 2007, PDF. Abstract.
The line: We use a Markov jump-linear-quadratic (MJLQ) approach to a benchmark New Keynesian model, analyzing how policy is affected by uncertainty, and how learning and active experimentation affect policy and losses. .
“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. PDF. Press 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.
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, PDF. Abstract.
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 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.
“Monetary-Policy Challenges: Monetary-Policy Responses to Oil-Price Changes,” presented at the meeting of the Bellagio Group of the G10, held at the Federal Reserve Board, Washington, DC, January 13-14, 2006, PDF.
The line: Central banks should respond to oil prices to the extent these impact forecasts of inflation and the output gap, and because this impact is complex, the response will be be complex and cannot be represented by a simple instrument rule.
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, 187-225, PDF. Abstract.
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.
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.
The line: Morris and Shin’s result in their 2002 AER paper has widely been interpreted as an anti-transparency result, but it is actually a pro-transparency result.
“Time Consistency of Fiscal and Monetary Policy: A Solution” (with Mats Persson and Torsten Persson, Institute for International Economic Studies), Aug 2005, Econometrica 74 (2006) 193-212, PDF. Abstract.
The line: Time consistency of optimal fiscal and monetary policy is possible after all, counter to the impression left by Lucas and Stokey (1983), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
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
“Flexible Inflation Targeting: Principles and Possible Improvements,” seminar at Norges Bank (Bank of Norway), Oslo, on March 25, 2004 (shorter version presented at Conference on Monetary Policy, Norges Bank, March 26, 2004), overhead slides (73 KB).
“Challenges for Monetary Policy,” presented at the meeting of the Bellagio Group of the G10, held at the National Bank of Belgium, Brussels, January 26-27, 2004, PDF (98 KB).
“Commentary” (on Laurence H. Meyer, “Practical Problems and Obstacles to Inflation Targeting”), Federal Reserve Bank of St. Louis Review 84(4) (July/August 2004) 161-164. PDF.
“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. PDF. Abstract.
“Comment on Jeffery D. Amato and Hyun Song Shin, ‘Public and Private Information in Monetary Policy Models’,” revised June 2003, presented at the conference “Monetary Stability, Financial Stability and the Business Cycle,” BIS, Basel, Mar 28-29, 2003, PDF(100 KB).
“Liquidity Traps, Policy Rules for Inflation Targeting, and Eurosystem Monetary-Policy Strategy,” research summary, NBER Reporter, Winter 2002/2003, PDF (119 KB). Previous research summary for NBER Reporter, Winter 97/98.
“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, Chicago, 19-83. PDF.Abstract.
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, PDF. Abstract.
Discussion of Vitor Gaspar and Frank Smets, “Monetary Policy, Price Stability and Output Gap Stabilization,” and Justin Wolfers, “Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Wellbeing,” at the conference “Stabilizing the Economy: What Roles for Fiscal and Monetary Policy?,” July 11, 2002, New York, PDF (160 KB).
“Comments on Nancy Stokey, ‘Rules and Discretion’ after Twenty-Five Years,” NBER Macroeconomics Annual 2002, 54-62. PDF (143 KB).
Discussion of Frank Smets and Rafael Wouters, “Monetary Policy in an Estimated SDGE Model of the Euro Area,” at the conference “Macroeconomic Models for Monetary Policy,” Federal Reserve Bank of San Francisco, Mar 1-2, 2002, overhead slides (PDF, 47 KB).
Discussion of Athanasios Orphanides and John C. Williams, “Imperfect Knowledge, Inflation Expectations, and Monetary Policy,” Econometric Society North American Winter Meeting, Atlanta, Jan 4-6, 2002, overhead slides (PDF, 56 KB).
Discussion of Thomas Laubach and John C. Williams, “Measuring the Natural Interest Rate,” American Economic Association Annual Meeting, Atlanta, Jan 4-6, 2002, overhead slides (PDF, 51 KB).
“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.
Comment on Michael Woodford, “Imperfect Common Knowledge and the Effects of Monetary Policy,” in Philippe Aghion, Roman Frydman, Joseph Stiglitz and Michael Woodford, eds., Knowledge, Information and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, Princeton University Press, 2003, 59-63. PDF (88KB).
Discussion of Calvo, Celasun and Kumhof, “A Theory of Rational Inflation Inertia,” IFM Workshop, NBER Summer Institute, July 16, 2001, overhead slides (PDF, 45KB).
“Comment on Charles Wyplosz, ‘Do We Know How Low Inflation Should Be?”, April 2001, revised version of comments presented at the First ECB Central Banking Conference, Why Price Stability?, Frankfurt, November 2-3, 2000, PDF (84 KB).
“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.
“Commentary: How Should Monetary Policy Respond to Shocks While Maintaining Long-Run Price Stability?—Conceptual issues,” in Achieving Price Stability, a symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming, August 29-31, 1996, PDF (74 KB).