Keywords: Inflation forecast targeting, optimal monetary policy, multiple equilibria
Abstract: We investigate the performance of forecast-based monetary policy rules
using five macroeconomic models that reflect a wide range of views on
aggregate dynamics. We identify the key characteristics of rules that
are robust to model uncertainty: such rules respond to the one-year
ahead inflation forecast and to the current output gap, and
incorporate a substantial degree of policy inertia. In contrast, rules
with longer forecast horizons are less robust and are prone to
generating indeterminacy. In light of these results, we identify a
robust benchmark rule that performs very well in all five models over
a wide range of policy preferences.
Full paper (367 KB PDF)
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Last update: October 17, 2001