On the Use of Current or Forward-Looking Data in Monetary Policy: A Behavioural Macroeconomic Approach

Paul De Grauwe and Yuemei Ji ()

No 8853, CESifo Working Paper Series from CESifo

Abstract: We analyse the use of current and forward-looking data in the setting of monetary policy (Taylor rule). We answer the question of whether the use of forward-looking data is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that the answer to our question depends on the nature of the monetary policy regime. In general, in a strict inflation targeting regime the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime. Finally, nowcasting tends to improve the quality of monetary policy especially in a strict inflation targeting regime.

Keywords: Taylor rule; behavioural macroeconomics; animal spirits; strict inflation targeting; dual mandate; nowcasting (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8853

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