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Forecast-Based Monetary PolicyJeffery D. Amato |
Abstract A number of central banks use (published or unpublished) forecasts of goal variables as
key ingredients in their decisions for instrument settings. This use of forecasts is
modelled as a particular form of objective with the minimization of which the central bank
is charged. We use an estimated optimization-based model with staggered price and wage
setting to analyze the welfare properties of such objectives and their implications for
the form of instrument rules. We find that stabilizing expected price inflation at a
horizon of two years around target dominates policies of stabilizing inflation at shorter
or longer horizons. However, stabilizing all Jeffery D. Amato is an economist at the Bank for International Settlements. Thomas Laubach is an economist at the Federal Reserve Bank of Kansas City. The authors gratefully acknowledge many helpful discussions with Michael Woodford, as well as comments from Mark Gertler, Peter Ireland, Julio Rotemberg, Argia Sbordone, and John Taylor. All remaining errors are those of the authors. The views expressed herein are those of the authors and do not necessarily reflect those of the Bank for International Settlements, the Federal Reserve Bank of Kansas City, or the Federal Reserve System.Amato e-mail: jeffery.amato@bis.org
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