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Model-based inflation forecasts and monetary policy rules

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  • Raf Wouters

    ()
    (National Bank of Belgium, Research Department)

  • Michel Dombrecht

    (National Bank of Belgium, Research Department)

Abstract

In this paper, the interaction between inflation and monetary policy rules is analysed within the framework of a dynamic general equilibrium model derived from optimising behaviour and rational expectations. Using model simulations, it is illustrated that the control of monetary policy over the inflation process is strongly dependent on the role of forward looking expectations in the price and wage setting process and on the credibility of monetary policy in the expectation formation process of the private sector. Furthermore, the central bank should take into account a wide variety of indicators in making monetary policy decisions in order to approach the optimal monetary policy rule as closely as possible.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP01.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 01.

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Length: 44 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:nbb:reswpp:200003-1

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