Forward-Looking Rules for Monetary Policy

52 Pages Posted: 30 Aug 2000

See all articles by Andrew Haldane

Andrew Haldane

Bank of England

Nicoletta Batini

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1998

Abstract

This paper evaluates a class of simple monetary policy rules which feed back from explicit forecasts of future inflation - inflation forecast-based (IFB) rules. These rules aim to mimic current monetary policy practices among the inflation-targeting countries, where policy decisions are based on inflation forecasts. The rules themselves are evaluated using simulations from a small, rational expectations, open-economy macro-model. IFB rules are found to perform well in comparison with other simple rules, such as the Taylor rule. The reasons for this are: first, because they embody the lags in monetary transmission, aligning explicitly the control and the feedback variables of the policymaker; second, because IFB rules are capable of smoothing output by as much as is possible with rules which target output directly - for example, through variations in the forecast horizon; and third, because IFB rules implicitly condition on all state variables, and thus are information-efficient. For these reasons, inflation-targeting rules with an explicitly forward-looking dimension are found to take us within reach of the fully-optimal rule.

Suggested Citation

Haldane, Andrew and Batini, Nicoletta, Forward-Looking Rules for Monetary Policy (May 1998). NBER Working Paper No. w6543. Available at SSRN: https://ssrn.com/abstract=226277

Andrew Haldane (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Nicoletta Batini

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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