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Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice

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  • Michael Woodford

Abstract

Forecast targeting is an innovation in central banking that represents an important step toward more rule-based policymaking, even if it is not an attempt to follow a policy rule of any of the types that have received primary attention in the theoretical literature on optimal monetary policy. This paper discusses the extent to which forecast targeting can be considered an example of a policy rule, and the conditions under which it would represent a desirable rule, with a view to suggesting improvements in the approaches currently used by forecast-targeting central banks. Particular attention is given to the intertemporal consistency of forecast-targeting procedures, the assumptions about future policy that should be used in constructing the forecasts used in such procedures, the horizon with which the target criterion should be concerned, the relevance of forecasts other than the inflation forecast, and the degree of robustness of a desirable target criterion for monetary policy to changing circumstances.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13716.

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Date of creation: Dec 2007
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Publication status: published as Michael Woodford, 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 3-24, Fall.
Handle: RePEc:nbr:nberwo:13716

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  1. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of inflation targeting based on constant interest rate projections," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(11), pages 1867-1892, November.
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Cited by:
  1. Fernando Alexandre & Pedro Bação & Vasco Gabriel, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy¤," School of Economics Discussion Papers, School of Economics, University of Surrey 0608, School of Economics, University of Surrey.
  2. Olivier Loisel, 2013. "The Implementation of Stabilization Policy," Working Papers, Centre de Recherche en Economie et Statistique 2013-24, Centre de Recherche en Economie et Statistique.
  3. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.
  4. Vasco Curdia & Michael Woodford, 2010. "Conventional and Unconventional Monetary Policy," Discussion Papers, Columbia University, Department of Economics 0910-17, Columbia University, Department of Economics.
  5. Giannoni, Marc & Woodford, Michael, 2010. "Optimal Target Criteria for Stabilization Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7719, C.E.P.R. Discussion Papers.
  6. Glenn Otto & Graham Voss, 2009. "Strict and Flexible Inflation Forecast Targets: An Empirical Investigation," Department Discussion Papers, Department of Economics, University of Victoria 0902, Department of Economics, University of Victoria.
  7. Alexandre, Fernando & Bação, Pedro & Gabriel, Vasco, 2010. "Soft landing in a Markov-switching economy," Economics Letters, Elsevier, Elsevier, vol. 107(2), pages 169-172, May.
  8. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers, National Bureau of Economic Research, Inc 17967, National Bureau of Economic Research, Inc.
  9. Michael Woodford, 2012. "Principled Policymaking in an Uncertain World," INET Research Notes, Institute for New Economic Thinking (INET) 10, Institute for New Economic Thinking (INET).

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