Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States

48 Pages Posted: 21 Jul 2015

See all articles by Ali Alichi

Ali Alichi

International Monetary Fund (IMF)

Kevin Clinton

Government of Canada - Bank of Canada

Charles Freedman

Government of Canada - Bank of Canada; National Bureau of Economic Research (NBER)

Ondra Kamenik

International Monetary Fund (IMF)

Michel Juillard

Banque de France - Economic Study and Research Division

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Jarkko Turunen

International Monetary Fund

Hou Wang

International Monetary Fund (IMF)

Date Written: June 2015

Abstract

The Fed has taken several steps towards strengthening its monetary framework over the past several years. Those steps have supported the Fed’s efforts to stimulate the economy through forward guidance despite being constrained by having policy rates at zero. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed’s communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.

Keywords: Monetary policy, United States, Interest rates, Monetary policy instruments, Inflation targeting, Econometric models, Optimal Control, central bank, economy, expectations, projections, phillips curve, forecasts, equilibrium, demand

JEL Classification: E30, E31, E58

Suggested Citation

Alichi, Ali and Clinton, Kevin and Freedman, Charles and Kamenik, Ondra and Juillard, Michel and Laxton, Douglas and Turunen, Jarkko and Wang, Hou, Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States (June 2015). IMF Working Paper No. 15/134. Available at SSRN: https://ssrn.com/abstract=2633919

Ali Alichi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kevin Clinton

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
613-782-8766 (Phone)
613-782 7508 (Fax)

Charles Freedman

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada
613 782-8045 (Phone)
613 782-7003 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ondra Kamenik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Michel Juillard

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Jarkko Turunen

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hou Wang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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