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Communicating Monetary Policy Rules

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  • Andrew T. Foerster
  • Troy A. Davig

Abstract

Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. {{p}} The approach requires central banks to specify an inflation target, tolerance bands, and provide economic projections. Thus, when inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this approach replicates and provides the same information as a rule-based policy.

Suggested Citation

  • Andrew T. Foerster & Troy A. Davig, 2017. "Communicating Monetary Policy Rules," Research Working Paper RWP 17-4, Federal Reserve Bank of Kansas City, revised 01 Apr 2017.
  • Handle: RePEc:fip:fedkrw:rwp17-04
    DOI: 10.18651/RWP2017-04
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    References listed on IDEAS

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    1. Carl Walsh, 2015. "Goals and Rules in Central Bank Design," CESifo Working Paper Series 5293, CESifo Group Munich.
    2. Daisuke Ikeda & Takushi Kurozumi, 2019. "Slow Post-financial Crisis Recovery and Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 82-112, October.
    3. Jason Choi & Andrew T. Foerster, 2016. "Optimal monetary policy regime switches," Research Working Paper RWP 16-7, Federal Reserve Bank of Kansas City, revised 01 Aug 2016.
    4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    5. Smets, Frank, 2000. "What horizon for price stability," Working Paper Series 24, European Central Bank.
    6. John H. Cochrane & John B. Taylor (ed.), 2016. "Central Bank Governance & Oversight Reform," Books, Hoover Institution, Stanford University, number 11, December.
    7. Carl E. Walsh, 2015. "Day Two Keynote Address: Goals and Rules in Central Bank Design," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 295-352, September.
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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