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Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice

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  • Michael Woodford

Abstract

Forecast targeting is an innovation in central banking that represents an important step toward more rule-based policymaking, even if it is not an attempt to follow a policy rule of any of the types that have received primary attention in the theoretical literature on optimal monetary policy. This paper discusses the extent to which forecast targeting can be considered an example of a policy rule, and the conditions under which it would represent a desirable rule, with a view to suggesting improvements in the approaches currently used by forecast-targeting central banks. Particular attention is given to the intertemporal consistency of forecast-targeting procedures, the assumptions about future policy that should be used in constructing the forecasts used in such procedures, the horizon with which the target criterion should be concerned, the relevance of forecasts other than the inflation forecast, and the degree of robustness of a desirable target criterion for monetary policy to changing circumstances.

Suggested Citation

  • Michael Woodford, 2007. "Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice," NBER Working Papers 13716, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13716
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    References listed on IDEAS

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    1. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
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    Cited by:

    1. Olivier Loisel, 2013. "The Implementation of Stabilization Policy," Working Papers 2013-24, Center for Research in Economics and Statistics.
    2. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers 17967, National Bureau of Economic Research, Inc.
    3. Vasco Cúrdia & Michael Woodford, 2010. "Conventional and unconventional monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 229-264.
    4. Glenn Otto & Graham Voss, 2009. "Strict and Flexible Inflation Forecast Targets: An Empirical Investigation," Department Discussion Papers 0902, Department of Economics, University of Victoria.
    5. Fernando Alexandre & Pedro Bação & Vasco Gabriel, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy¤," School of Economics Discussion Papers 0608, School of Economics, University of Surrey.
    6. Giannoni, Marc P. & Woodford, Michael, 2017. "Optimal target criteria for stabilization policy," Journal of Economic Theory, Elsevier, vol. 168(C), pages 55-106.
    7. repec:eee:jmacro:v:54:y:2017:i:pa:p:7-11 is not listed on IDEAS
    8. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.
    9. Alexandre, Fernando & Bação, Pedro & Gabriel, Vasco, 2010. "Soft landing in a Markov-switching economy," Economics Letters, Elsevier, vol. 107(2), pages 169-172, May.
    10. repec:eee:eecrev:v:100:y:2017:i:c:p:95-115 is not listed on IDEAS
    11. Magdalena Szyszko, . "Central Bank’s Inflation Forecast and Expectations. A Comparative Analysis," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-14.

    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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