Forward-Looking Rules for Monetary Policy / Andrew G. Haldane, Nicoletta Batini.

Format:

Book

Author/Creator:

Haldane, Andrew G.

Contributor:

National Bureau of Economic Research.

Batini, Nicoletta.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6543.

NBER working paper series no. w6543

Language:

English

Subjects (All):

Monetary policy--Econometric models.

Monetary policy.

Taxation.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Cambridge, Massachusetts : National Bureau of Economic Research, 1998.

Summary:

This paper evaluates a class of simple monetary policy rules which feed back from explicit forecasts of future inflation - inflation forecast-based (IFB) rules. These rules aim to mimic current monetary policy practices among the inflation-targeting countries, where policy decisions are based on inflation forecasts. The rules themselves are evaluated using simulations from a small, rational expectations, open-economy macro-model. IFB rules are found to perform well in comparison with other simple rules, such as the Taylor rule. The reasons for this are: first, because they embody the lags in monetary transmission, aligning explicitly the control and the feedback variables of the policymaker; second, because IFB rules are capable of smoothing output by as much as is possible with rules which target output directly - for example, through variations in the forecast horizon; and third, because IFB rules implicitly condition on all state variables, and thus are information-efficient. For these reasons, inflation-targeting rules with an explicitly forward-looking dimension are found to take us within reach of the fully-optimal rule.

Notes:

Print version record

May 1998.