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):Economic Fluctuations and Growth, Monetary Economics

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

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6157

Published:

Users who downloaded this paper also downloaded* these:
Svensson and Woodford Implementing Optimal Policy through Inflation-Forecast Targeting
Stock and Watson w14322 Phillips Curve Inflation Forecasts
Mishkin w7618 Inflation Targeting in Emerging Market Countries
Bernanke, Boivin, and Eliasz w10220 Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach
Bernanke and Kuttner w10402 What Explains the Stock Market's Reaction to Federal Reserve Policy?
 
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