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Velocity Futures Markets: Does the Fed Need a Structural Model?

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  • Aaron L. Jackson
  • Scott Sumner

Abstract

Previous proposals suggesting monetary policy makers target private-sector forecasts have been shown to be problematic. As policy becomes more effective, private-sector forecasts become less informative. Under perfect stabilization private-sector forecasts provide no useful guidance to monetary policy makers about economic shocks. We illustrate a way around this circularity problem by creating a policy futures market linked to the ratio of the (realization of the) policy goal for next period and the current instrument setting. The implication is that extensive information gathering is unnecessary, weakening the argument that central banks need a structural model to conduct policy. (JEL E52, E44, E42) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbj044
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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 44 (2006)
Issue (Month): 4 (October)
Pages: 716-728

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Handle: RePEc:oup:ecinqu:v:44:y:2006:i:4:p:716-728

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Cited by:
  1. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
  2. Jackson, Aaron L., 2010. "Policy futures markets with multiple goals," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 45-54, March.

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