Monetary Policy with Judgment: Forecast Targeting / Lars E.O. Svensson.

Format:

Book

Author/Creator:

Svensson, Lars E.O.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11167.

NBER working paper series no. w11167

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Monetary Policy with Judgment

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

"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.

Notes:

Print version record

March 2005.