Monetary Policy with Judgment: Forecast Targeting

Lars Svensson

No 11167, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: "Forecast targeting," forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank's judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.

JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (115)

Published as Lars E O Svensson, 2005. "Monetary Policy with Judgment: Forecast Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.

Downloads: (external link)
http://www.nber.org/papers/w11167.pdf (application/pdf)

Related works:
Journal Article: Monetary Policy with Judgment: Forecast Targeting (2005)
Working Paper: Monetary Policy with Judgement: Forecast Targeting (2005)
Working Paper: Monetary policy with judgment: forecast targeting (2005)
Working Paper: Monetary Policy with Judgment: Forecast Targeting (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:11167

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11167

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().