Forecast-Based Monetary Policy

40 Pages Posted: 13 Dec 2005

See all articles by Jeffery D. Amato

Jeffery D. Amato

Goldman Sachs International

Thomas Laubach

Federal Reserve Board

Date Written: August 2000

Abstract

This article analyses the welfare consequences of delegating to the central bank the task of minimising deviations of forecasts of goal variables from their target values. The delegated objectives considered in this article are motivated by the observation that central banks oftentimes operate under objectives which do not necessarily represent society's preferences. The analysis is performed using an estimated model of optimising households and firms that generates tradeoffs between stabilising wage and price inflation and the output gap. We find that when the central bank's objective is defined solely in terms of price inflation, it is welfare optimal to stabilise only those fluctuations in price inflation that are forecastable at least five quarters ahead. On the other hand, when the central bank's objective involves both wage and price inflation stabilisation, the central bank should stabilise all fluctuations in these variables, not just those forecastable at some horizon.

Suggested Citation

Amato, Jeffery D. and Laubach, Thomas, Forecast-Based Monetary Policy (August 2000). BIS Working Paper No. 89. Available at SSRN: https://ssrn.com/abstract=849028 or http://dx.doi.org/10.2139/ssrn.849028

Jeffery D. Amato (Contact Author)

Goldman Sachs International ( email )

United States

Thomas Laubach

Federal Reserve Board ( email )

20th & C. St., N.W.
Mailstop 61
Washington, DC 20551
United States
202-452-2715 (Phone)
202-452-3819 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
736
rank
369,487
PlumX Metrics