Conducting monetary policy without a nominal anchor

The analysis of a simple macro model with forward-looking expectations suggests that a monetary authority can operate a stable and determinate gradualist interest rate policy only as long as concern for inflation is teamed with monitoring other indicators, supporting the policy eclecticism of the recent Monetary Policy Report to Congress. In general, an interest rate-smoothing rule cannot be based solely on relative prices or rates of return, including relative commodity prices and the slope of the yield curve, or respond solely to real magnitudes, such as the output gap. Any of these indicator variables, however, complement the use of an inflation target.