Forecast-based monetary policy

Jeffery D. Amato and Thomas Laubach

No 99-10, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: A number of central banks use (published or unpublished) forecasts of goal variables as key ingredients in their decisions for instrument settings. This use of forecasts is modelled as a particular form of objective with the minimization of which the central bank is charged. We use an estimated optimization-based model with staggered price and wage setting to analyze the welfare properties of such objectives and their implications for the form of instrument rules. We find that stabilizing expected price inflation at a horizon of two years around target dominates policies of stabilizing inflation at shorter or longer horizons. However, stabilizing all fluctuations, not just forecastable ones, in both wage and price inflation leads to the closest approximation to the welfare-optimal rule.

Keywords: Monetary policy; Forecasting (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (9)

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Working Paper: Forecast-based monetary policy (2000)
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