NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Monetary Policy with Judgment: Forecast Targeting

Lars E.O. Svensson

NBER Working Paper No. 11167
Issued in March 2005
NBER Program(s):Monetary Economics

"Forecast targeting," forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank's judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.

download in pdf format
   (758 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11167

Published: Lars E O Svensson, 2005. "Monetary Policy with Judgment: Forecast Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May. citation courtesy of

Users who downloaded this paper also downloaded* these:
Svensson and Williams w11733 Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
Svensson w9421 What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules
Svensson w16654 Inflation Targeting
Svensson w15385 Evaluating Monetary Policy
Svensson w10747 Targeting Rules vs. Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson?
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us