NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Policy with Judgment: Forecast Targeting

Lars E.O. Svensson

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

"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

This paper is available as PDF (758 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

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.

Users who downloaded this paper also downloaded these:
Svensson and Williams w11733 Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
Jolls and Sunstein w11738 Debiasing through Law
Mian and Sufi w15283 House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Svensson w15385 Evaluating Monetary Policy
Svensson w9421 What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules
 
Publications
Activities
Meetings
Data
People
About

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

Contact Us