Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
The Case for Forecast Targeting as a Monetary Policy Strategy
Journal of Economic Perspectives
vol. 21,
no. 4, Fall 2007
(pp. 3–24)
(Complimentary)
Abstract
At central banks around the world, including the Bank of England, Sweden's Riksbank, Norway's Norges Bank, and the Reserve Bank of New Zealand, policy is conducted on the basis of "inflation-forecast targeting": the central bank constructs quantitative projections of the economy's expected future evolution based on the way in which it intends to control short-term interest rates, and public discussion of those projections plays a critical role in justifying the banks' conduct of monetary policy to the public. What accounts for the appeal of this approach? Should it be adopted more widely or more explicitly? I review the long-running debate between proponents of monetary rules and proponents of discretionary monetary policy and argue that inflation-forecast targeting represents a powerful synthesis of the two approaches. I explore some common questions that arise about inflation-forecast targeting and consider how the U.S. Federal Reserve might move toward an explicit policy of inflation-forecast targeting.Citation
Woodford, Michael. 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy." Journal of Economic Perspectives, 21 (4): 3–24. DOI: 10.1257/jep.21.4.3JEL Classification
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation
- E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
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