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Showing results 1 to 8 of approximately 8.
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Working Paper
Forecast-based monetary policy
A number of central banks use (published or unpublished) forecasts of goal variables as key ingredients in their decisions for instrument settings. This use of forecasts is modelled as a particular form of objective with the minimization of which the central bank is charged. We use an estimated optimization-based model with staggered price and wage setting to analyze the welfare properties of such objectives and their implications for the form of instrument rules. We find that stabilizing expected price inflation at a horizon of two years around target dominates policies of stabilizing ...
Working Paper
Monetary policy in an estimated optimization-based model with sticky prices and wages
This paper serves two purposes. First, it provides estimates of an optimization-based equilibrium model with sticky prices and wages. Second, the estimated model is used to analyze the welfare properties of various interest rate rules for conducting monetary policy. As shown by Erceg et al. (1999), an important feature of this model is that it involves a tradeoff between the variances of price and wage inflation and the output gap. This tradeoff implies that it is desirable for the monetary authority to respond to more than inflation, output, and past interest rates when setting the current ...
Working Paper
The real-time (in)significance of M2
This paper examines the relationships between output, prices, interest rates, and M2 using data sets which were available in real time from 1973:1 to 1997:4. The purpose is threefold. First, the paper delineates a potential role for M2 in policymaking. Second, it provides a more accurate basis for interpreting historical policymaking. Third, it evaluates the cause and effect of the historical redefinitions of M2. The latter two objectives make it necessary to use data which was available to policymakers at the time decisions were made. In regard to the first objective, the approach is both ...
Journal Article
The role of forecasts in monetary policy
Forecasts of future economic developments play an important role for the monetary policy decisions of central banks. For example, forecasts of goal variables can help central banks achieve their goals and make them more accountable to the public. There are two primary explanations for the benefits of forecasts. The first is that monetary policy affects goal variables such as inflation and output only with substantial lags. Policy actions should, therefore, be based on forecasts of goal variables at horizons consistent with policy lags and be taken when these forecasts are inconsistent with ...
Working Paper
Rule-of-thumb behaviour and monetary policy
We investigate the implications of rule-of-thumb behaviour on the part of consumers or price setters for optimal monetary policy and simple interest rate rules. The existence of such behaviour leads to endogenous persistence in output and inflation; changes the transmission of shocks to these variables; and alters the policymaker's welfare objective. Our main finding is that highly inertial policy is optimal regardless of what fraction of agents occasionally follow a rule of thumb. We also find that the interest rate rule that implements optimal policy in the purely optimising case, and a ...
Working Paper
Implications of habit formation for optimal monetary policy
We study the implications for optimal monetary policy of introducing habit formation in consumption into a general equilibrium model with sticky prices. Habit formation affects the model's endogenous dynamics through its effects on both aggregate demand and households' supply of output. We show that the objective of monetary policy consistent with welfare maximization includes output stabilization, as well as inflation and output gap stabilization. We find that the variance of output increases under optimal policy, even though it acquires a higher implicit weight in the welfare function. We ...
Journal Article
The value of interest rate smoothing : how the private sector helps the Federal Reserve
Most central banks conduct monetary policy by setting targets for overnight interest rates. During the 1990s, central banks have tended to move these interest rates in small steps without reversing direction quickly, a practice called interest rate smoothing. For example, the majority of Federal Reserve policy moves in the last decade and a half have come in a sequence of 25 basis point moves, in striking contrast to the early 1980s, when short-term interest rates fluctuated widely. In light of this historical contrast, it is natural to ask whether interest rate smoothing is a desirable way ...
Working Paper
Rule-of-Thumb Behaviour and Monetary Policy
We investigate the implications of rule-of-thumb behaviour on the part of consumers or price setters for optimal monetary policy and simple interest rate rules. The existence of such behaviour leads to endogenous persistence in output and inflation; changes the transmission of shocks to these variables; and alters the policymaker's welfare objective. Our main finding is that highly inertial policy is optimal regardless of what fraction of agents occasionally follow a rule of thumb. We also find that the interest rate rule that implements optimal policy in the purely optimising case, and a ...