Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States

Ali Alichi, Kevin Clinton, Charles Freedman, Ondrej Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen and Hou Wang

No 2015/134, IMF Working Papers from International Monetary Fund

Abstract: The Fed has taken several steps towards strengthening its monetary framework over the past several years. Those steps have supported the Fed’s efforts to stimulate the economy through forward guidance despite being constrained by having policy rates at zero. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed’s communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.

Keywords: WP; reaction function; inflation objective; Phillips curve; inflation expectation; inflation implication; interest rate path; Inflation Targeting; Monetary Policy; Optimal Control; policy action; FOMC policy rate forecast; inflation equation; Inflation; Central bank policy rate; Output gap; Real interest rates; Global (search for similar items in EconPapers)
Pages: 47
Date: 2015-06-24
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Citations: View citations in EconPapers (14)

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