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Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule

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  • Fuhrer, Jeffrey C
  • Moore, George R

Abstract

At the turn of the century, Knut Wicksell proposed a monetary policy rule that has become conventional wisdom: raise interest rates when inflation is above target and vice versa. The authors discover some surprising properties of this rule. When the rule is included in a model in which inflation is driven by the short real rate, the model is unstable. When the rule is combined with a Phillips curve driven by a backward-looking long real rate, the model is unstable. However, when a forward-looking component is added to inflation or the long real rate, the policy stabilizes the rate of inflation. Copyright 1995 by Ohio State University Press.

Suggested Citation

  • Fuhrer, Jeffrey C & Moore, George R, 1995. "Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1060-1070, November.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:1060-70
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