Inflation Forecasts and Monetary Policy / Ben S. Bernanke, Michael Woodford.

Format:

Book

Author/Creator:

Bernanke, Ben S.

Contributor:

National Bureau of Economic Research.

Woodford, Michael.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6157.

NBER working paper series no. w6157

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply, we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium, and that policies approximating strict inflation-forecast targeting are likely to have undesirable properties. We also show that economies with more general forecast-based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria. We conclude that, although private-sector forecasts may contain information useful to the central bank, ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions.

Notes:

Print version record

September 1997.