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What Rule for the Federal Reserve? Forecast Targeting

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  • Lars E.O. Svensson

    (Stockholm School of Economics, CEPR, and NBER)

Abstract

Forecast targeting means selecting a policy rate and policy rate path so that the forecasts of inflation and employment "look good," that is, best fulfill the Federal Reserve's dual mandate. It means publishing, explaining, and justifying the path and forecasts. This contributes to their credibility and to effective policy implementation. External observers can review policy and hold the Federal Reserve accountable, both in real time and after the fact. Forecast targeting uses all relevant information and allows adaption to new circumstances and therefore performs better than a Taylor-type rule. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting. Forecast targeting can be used with the new monetary policy strategy of flexible average inflation targeting announced in August 2020.

Suggested Citation

  • Lars E.O. Svensson, 2020. "What Rule for the Federal Reserve? Forecast Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 39-95, December.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:5:a:2
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    References listed on IDEAS

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    Cited by:

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    3. Mota, Paulo R. & Fernandes, Abel L.C., 2022. "Is the ECB already following albeit implicitly an average inflation targeting strategy?," Research in Economics, Elsevier, vol. 76(3), pages 149-162.
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    7. Erceg, Christopher J. & Jakab, Zoltan & Lindé, Jesper, 2021. "Monetary policy strategies for the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    8. Koenig, Linda J. & Flores, Stephen A. & Mulatu, Mesfin S., 2022. "Project PrIDE in Context: Evolution of Evaluation in the Centers for Disease Control and Prevention's Multi-Jurisdictional HIV Prevention Demonstration Projects," Evaluation and Program Planning, Elsevier, vol. 90(C).
    9. Matteo Cacciatore & Dmitry Matveev & Rodrigo Sekkel, 2022. "Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from Academic Literature," Discussion Papers 2022-9, Bank of Canada.
    10. Curi, Claudia & Murgia, Lucia Milena, 2023. "Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England," Finance Research Letters, Elsevier, vol. 51(C).

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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