NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation Forecasts and Monetary Policy

Ben S. Bernanke, Michael Woodford

NBER Working Paper No. 6157
Issued in September 1997
NBER Program(s):   EFG   ME

Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply, we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium, and that policies approximating strict inflation-forecast targeting are likely to have undesirable properties. We also show that economies with more general forecast-based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria. We conclude that, although private-sector forecasts may contain information useful to the central bank, ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions.

download in pdf format
   (1376 K)

email paper

This paper is available as PDF (1376 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6157

Published:

Users who downloaded this paper also downloaded these:
Barro and Gordon w0807 A Positive Theory of Monetary Policy in a Natural-Rate Model
Alvarez and Atkeson w5678 Money and Exchange Rates in the Grossman-Weiss-Rotemberg Model
Rudebusch and Svensson Policy Rules for Inflation Targeting
Bernanke and Mihov w5145 Measuring Monetary Policy
Orphanides and Williams Imperfect Knowledge, Inflation Expectations, and Monetary Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

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

Contact Us