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Forecasts and sunspots: looking back for a better future

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  • Charles T. Carlstrom
  • Timothy J. Fuerst

Abstract

To head off inflation before it gets started, central banks must use forecasts to determine monetary policy actions. But doing so introduces the possibility that inflation will increase just because the public expects it to. This Economic Commentary explains how random events (sunspots) can affect economic systems and create price volatility. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation.

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File URL: http://www.clevelandfed.org/Research/commentary/1999/1101.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Economic Commentary.

Volume (Year): (1999)
Issue (Month): Nov ()
Pages:

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Handle: RePEc:fip:fedcec:y:1999:i:nov

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Cited by:
  1. Mark WEDER, 2006. "Interest rate rules and macroeconomic stabilization," Discussion Papers (REL - Recherches Economiques de Louvain) 2006025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Weder, Mark, 2003. "Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations," CEPR Discussion Papers 3899, C.E.P.R. Discussion Papers.
  3. Mark Weder, 2004. "Taylor Rules: intercepting expectations," Money Macro and Finance (MMF) Research Group Conference 2003 110, Money Macro and Finance Research Group.

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