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When does an interest rate path “look good”? Criteria for an appropriate future interest rate path

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    Abstract

    Svensson (2004) suggested that a monetary policy committee of a central bank (MPC) should “find an instrument-rate path such that projections of inflation and output gap ‘look good’.” Academic literature on monetary policy gives guidance as to what the words “look good” means. However, there is a need for a translation of the theoretical framework into concrete criteria when an MPC shall evaluate interest rate paths in practice. Six criteria for an appropri-ate interest rate path are presented. In the November 2005 Inflation Report, Norges Bank presented for the first time an optimal interest rate path including a fan chart illustrating the uncertainty of the forecast using these criteria. Ex-amples used in explaining the criteria are drawn from Norwegian experiences.

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    File URL: http://www.norges-bank.no/Upload/import/publikasjoner/arbeidsnotater/pdf/arb-2006-05.pdf
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    Bibliographic Info

    Paper provided by Norges Bank in its series Working Paper with number 2006/05.

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    Length: 20 pages
    Date of creation: 09 May 2006
    Date of revision:
    Handle: RePEc:bno:worpap:2006_05

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    Keywords: Forecasts; flexible inflation targeting; optimal monetary policy;

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    1. Kenneth N Kuttner, 2004. "A Snapshot of Inflation Targeting in its Adolescence," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    2. Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," Working Paper Series 83, Sveriges Riksbank (Central Bank of Sweden).
    3. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    4. Charles Goodhart, 2005. "The Interest Rate Conditioning Assumption," FMG Discussion Papers dp547, Financial Markets Group.
    5. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
    6. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," International Finance Discussion Papers 807, Board of Governors of the Federal Reserve System (U.S.).
    7. Orphanides, Athanasios & Porter, Richard D. & Reifschneider, David & Tetlow, Robert & Finan, Frederico, 2000. "Errors in the measurement of the output gap and the design of monetary policy," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 117-141.
    8. Charles Goodhart, 2005. "The interest rate conditioning assumption," LSE Research Online Documents on Economics 24666, London School of Economics and Political Science, LSE Library.
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    Cited by:
    1. Michael Woodford, 2012. "Forecast Targeting as a Monetary Policy Strategy - Policy Rules in Practice," Book Chapters, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 9 Hoover Institution, Stanford University.

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