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On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach

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  • De Grauwe, Paul
  • Ji, Yuemei

Abstract

We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation targeting (SIT) regime, the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime, because the first regime creates more extreme movements in output and inflation than the second one. We also find that nowcasting tends to improve the quality of monetary policy, especially in a SIT regime. Finally, we provide a case study of monetary policies in the USA and the eurozone during 2000–20.

Suggested Citation

  • De Grauwe, Paul & Ji, Yuemei, 2023. "On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach," LSE Research Online Documents on Economics 115547, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:115547
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    Keywords

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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