Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152910
Authors: 
Svensson, Lars E. O.
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 476
Abstract: 
“Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A practical finite-horizon approximation is used. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complex function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.
Subjects: 
forecasts
inflation targeting
optimal monetary policy
JEL: 
E42
E52
E58
Document Type: 
Working Paper

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