Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule

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Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule

Author Info

Fuhrer, Jeffrey C
Moore, George R

Additional information is available for the following registered author(s):

Jeffrey C. Fuhrer

Abstract

At the turn of the century, Knut Wicksell proposed a monetary policy rule that has become conventional wisdom: raise interest rates when inflation is above target and vice versa. The authors discover some surprising properties of this rule. When the rule is included in a model in which inflation is driven by the short real rate, the model is unstable. When the rule is combined with a Phillips curve driven by a backward-looking long real rate, the model is unstable. However, when a forward-looking component is added to inflation or the long real rate, the policy stabilizes the rate of inflation. Copyright 1995 by Ohio State University Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 4 (November)
Pages: 1060-70
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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:1060-70

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- Athanasios Orphanides & John C. Williams, 2007. "Inflation targeting under imperfect knowledge," Economic Review, Federal Reserve Bank of San Francisco, pages 1-23. [Downloadable!]
Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Papers in Applied Economic Theory 2003-01, Federal Reserve Bank of San Francisco. [Downloadable!]
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Oreste Tristani, 2007. "Model misspecification, the equilibrium natural interest rate and the equity premium," Working Paper Series 808, European Central Bank. [Downloadable!]
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Michael Woodford, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," NBER Working Papers 6188, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Woodford, M., 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Papers 632, Stockholm - International Economic Studies.
- Woodford, Michael, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Seminar Papers 632, Stockholm University, Institute for International Economic Studies.
- Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January. [Downloadable!] (restricted)
Michal Brzoza-Brzezina, 2003. "Estimating the Natural Rate of Interest: A SVAR Approach," Macroeconomics 0301008, EconWPA. [Downloadable!]
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