Forecast-based Monetary Policy

Abstract

Fax: +41 61 / 280 91 00 and +41 61 / 280 81 00This publication is available on the BIS website (www.bis.org). This article analyses the welfare consequences of delegating to the central bank the task of minimising deviations of forecasts of goal variables from their target values. The delegated objectives considered in this article are motivated by the observation that central banks oftentimes operate under objectives which do not necessarily represent society's preferences. The analysis is performed using an estimated model of optimising households and firms that generates tradeoffs between stabilising wage and price inflation and the output gap. We find that when the central bank's objective is defined solely in terms of price inflation, it is welfare optimal to stabilise only those fluctuations in price inflation that are forecastable at least five quarters ahead. On the other hand, when the central bank's objective involves both wage and price inflation stabilisation, the central bank should stabilise all fluctuations in these variables, not just those forecastable at some horizon. © Bank for

Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches

“…7 For the purposes of this study, I limit my attention to simple forward-looking variants 7 See Ball (1999), CGG (1999, Hetzel (2000), McCallum (1999), Taylor(1999b), Williams (1999), Woodford (2000), and references therein. Particularly relevant for forward-looking variants of these policy rules, such as examined here, is the work of Amato and Laubach (1999), Batini and Haldane (1999), Batini and Nelson (2000), Williams (1999, 2000), Nessen (1999), Rudebusch and Svensson (1999), and Smets (2000). These forward-looking rules also provide a useful analytical framework for the inflation targeting approach to policy, as discussed in Bernanke and Mishkin (1997), Bernanke, Laubach, Mishkin and Posen (1998), and Svensson (1997Svensson ( , 1999.…”

Forecast‐Based Monetary Policy: The Case of Sweden

“…The central bank's problem is then to find what the forecast horizon of such a sub-optimal rule should be, given its preferences for inflation stabilization (and possibly other objectives). Such models of inflation targeting have been analysed by, for example, Amato and Laubach (1999), Batini and Haldane (1999), Batini and Nelson (2001), and Leitemo (2003). Numerical examples suggest that neither very short nor very long forecast horizons are desirable, but that the optimal horizon very well may be around two years.…”

Monetary Policy Rules, Macroeconomic Stability and Inflation: A View from the Trenches

“…As can be easily seen, β > 1 reflects a policy that raises real rates with inflation, a response that is generally stabilizing, while β < 1 indicates the 7 See Ball (1999), CGG (1999), Hetzel (2000), McCallum (1999), Taylor(1999b), Williams (1999), Woodford (2000), and references therein. Particularly relevant for forward-looking variants of these policy rules, such as examined here, is the work of Amato and Laubach (1999), Batini and Haldane (1999), Batini and Nelson (2000), Williams (1999, 2000), Nessen (1999), Rudebusch and Svensson (1999), and Smets (2000). These forward-looking rules also provide a useful analytical framework for the inflation targeting approach to policy, as discussed in Bernanke and Mishkin (1997), Bernanke, Laubach, Mishkin and Posen (1998), and Svensson (1997Svensson ( , 1999.…”