targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

investment stability and taxation in a long run macroeconomic model abstract this paper investigates for a one sector model in which the consumer investor s preferences are randomly changing the relationship between an economy s size and variability it is observed that means and variances of the stationary probability distributions on capital stock and output move together for given parameter changes unless some specific form of government intervention is introduced

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

when internal reference prices and price expectations diverge the role of confidence abstract when do internal reference prices differ from articulated price expectations the authors propose that the internal reference price depends not only on the magnitude of the expected price but also on the confidence associated with this expectation four experiments delineate the effects of price expectation and confidence on the internal reference price in experiments 1 and 2 the authors manipulate repetition and examine the effects of repetition induced confidence on price judgments in experiments 3 and 4 they manipulate confidence directly to investigate its effects on judgments the results from all four experiments suggest that consumers with less confidence have higher internal reference prices than more confident consumers even when they do not differ in their articulated price expectations the authors discuss the implications of these results for pricing theory

learning experimentation and monetary policy abstract we present a model of monetary policy where the policymaker faces uncertainty about which he is learning in a bayesian fashion a fixed money supply rule is not optimal since the learning leads to adjustments in the monetary action we present cases in which it is optimal to bear some cost in terms of current output performance in order to gain information that can be used in the formulation of future monetary policy experimentation therefore pays we also show that even passive learning without experimentation still leads to an activist monetary policy i e one that is responsive to new information

inflation forecasts and monetary policy 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 this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

inflation targeting some extensions previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks consequences of model uncertainty and effects of interest rate smoothing and stabilization model uncertainty output stabilization and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target the conditional inflation forecast is the natural intermediate target during inflation targeting the optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action jel classification e42 e52 e58

inflation variability and gradualist monetary policy this paper considers the optimal approach to reducing inflation when the cost of inflation is its conditional variability inflation is stochastically related to money growth with unobservable time varying autonomous and induced components a sharp reduction in money growth provides information about the responsiveness of inflation to money but also induces variability as the economy heads into unknown territory gradual policy is always optimal and the model explains why moderate inflation countries adopt a much more gradual money growth reduction than high inflation countries additionally the analysis sheds light on the more general problem of learning with two unobservable parameters

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

flexible inflation targeting and financial stability is it enough to stabilize inflation and output abstract we investigate empirically whether a central bank can promote financial stability by stabilizing inflation and output and whether additional stabilization of asset prices and credit growth would enhance financial stability in particular we employ an econometric model of the norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth in addition to inflation and output we find that output stabilization tends to improve financial stability additional stabilization of house prices equity prices and or credit growth enhances stability in both inflation and output but has mixed effects on financial stability in general financial stability as measured by e g asset price volatility improves while financial stability measured by indicators that depend directly on interest rates deteriorates mainly because of higher interest rate volatility owing to a more active monetary policy

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

targeting nominal income an appraisal the practice of setting target growth rates for a year or more ahead for some measure of the mofiey supply is now followed by many industrialised countries however it has been suggested by a number of authors e g meade i978 in his nobel prize lecture tobin i980 in his retrospective on stabilisation policy brittan i98i that it would be more sensible to pursue targets for nominal income rather than the money supply meade for instance argues that controlling nominal income is in any case the ultimate goal of those who favour fixed monetary targets and that an excessive concentration on the means rather than the end is confusing to private agents and can lead to undesirable fluctuations in the demand for output when velocity shifts he goes on to advocate that nominal income targets should be linked to the development of wage fixing institutions designed to mimic competitive behaviour in this paper we examine the implications of such a proposal for the performance of the economy in the context of a simple stochastic macroeconomic model under rational expectations a contracting framework is adopted in which the wage is fixed in a state of uncertainty about future levels of demand and productivity the objective of the authorities is to minimise the divergence of output from its full information equilibrium level if labour supply is inelastic then it turns out that maintaining the level of nominal income is actually the optimal policy if labour supply is elastic nominal income targetry provides an optimal response to demand is lm shocks but a suboptimal response to productivity shocks however a sufficient condition for a nominal income target to be preferable to a fixed money supply target is that the price elasticity of aggregate demand be less than unity the paper concludes by examining the implications of pursuing target growth rates rather than levels it should be conceded at the outset that there are several pertinent issues not addressed such as the greater comprehensibility of nominal income targets to private agents or the possibility that nominal income targets may leave the authorities with too much discretion e g poole i980 the issue of labour market reform is also ignored this is an enormous subject which it would be impossible to do justice to here see for instance meade s own analysis of the problem in meade i982 such reforms might be expected to affect the parameters of the model nevertheless since changes in labour market practices are neither a precondition for nor a logical consequence of nominal income targets an independent analysis of the macrceconomic implications of the latter is still highly relevant

interest rates and monetary policy this article conducts a thorough intertemporal analysis of nominal interest rate based monetary policy its main contribution is to show how such a policy can have different effects depending on the assumptions made about the saving and borrowing behaviour of firms we consider two cases i consumers are savers and firms are borrowers and ii both consumers and firms are borrowers the nation as a whole is borrowing from abroad in one case we confirm conventional wisdom but in the other case we find there may be unexpected and surprising results moreover our analysis has important implications for both inflation and nominal exchange rate targeting policies

the role of model uncertainty and learning in the u s postwar policy response to oil prices abstract this paper studies optimal monetary policy in a framework that explicitly accounts for policymakers uncertainty about the channels of transmission of oil prices into the economy more specifically using postwar us data i examine the evolution of the policy recommendations originating from an optimal linear regulator problem that encompasses model uncertainty and learning as proposed by cogley and sargent 2005b in this environment i find that one of the underlying models dominates the robust interest rate response to oil prices and i show that this result is due to the instability of this specification in the sample period under analysis

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

robust optimal policy in a forward looking model with parameter and shock uncertainty this paper characterizes a robust optimal policy rule in a simple forward looking model when the policymaker faces uncertainty about model parameters and shock processes we show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations however uncertainty may amplify the degree of super inertia required by optimal monetary policy we finally discuss the sensitivity of the results to alternative assumptions copyright 2007 john wiley sons ltd

policy mandates and institutional architecture abstract the model developed in this paper examines the interaction between monetary and macroprudential policies in promoting macroeconomic stability highlighting the role of shocks and policy instruments the paper shows that assigning the mandates of monetary and financial stability to independent authorities enhances macroeconomic stability only when some level of coordination exists between policymakers and it is the dominant institutional arrangement when monetary stability is socially important instead when society values financial stability internalising the policy spillovers by assigning the two mandates to a single policymaker could become the dominant configuration depending on the model s parameter values

risk management nonlinearity and aggressiveness in monetary policy the case of the us fed we contribute to the empirical literature on the risk management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets using quarterly data for the greenspan period we find that i risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature such as the level of inflation and the output gap ii estimation of regime switching models shows that the response of the us fed to the inflation outlook is invariant across policy regimes iii however in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances and iv the us fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s and in the late 1990s and early 2000s these results are consistent with mishkin 2008 s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances

on the equivalence of private and public money abstract when does a swap between private and public money leave the equilibrium allocation and price system unchanged to answer this question the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles we derive sufficient conditions for equivalence and apply them in the context of the chicago plan cryptocurrencies the indian de monetization experiment and central bank digital currency cbdc our results imply that cbdc coupled with central bank pass through funding need not imply a credit crunch nor undermine financial stability

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target