Online Monitoring of Policy Optimality

Bjarni Einarsson

Economics from Department of Economics, Central bank of Iceland

Abstract: The paper presents a method for online evaluation of the optimality of the current stance of monetary policy given the most up to date data available. The framework combines estimates of the causal effects of monetary policy tools on inflation and the unemployment gap with forecasts for these target variables. The forecasts are generated with a nowcasting model, incorporating new data as it becomes available, while using entropy tilting to anchor the long end of the forecast at long run survey expectations. In a retrospective analysis of the Fed's monetary policy decisions in the lead up to the Great Recession the paper finds rejections of the optimality of the policy stance as early as the beginning of February 2008. This early detection stems from the timely nowcasting of the deteriorating unemployment outlook.

JEL-codes: C01 C32 C52 C53 C55 E31 E32 E37 E52 E58 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp95

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