Working Paper: CEPR ID: DP14247
Authors: Lars E.O. Svensson
Abstract: The paper finds that the general monetary policy strategy of "forecast targeting" is more suitable for fulfilling the Federal Reserve's dual mandate of maximum employment and price stability than following a simple "instrument" rule such as a Taylor-type rule. Forecast targeting can be used for any of the more specific strategies of annual-inflation targeting, price-level targeting, temporary price-level targeting, average-inflation targeting, and nominal-GDP targeting. These specific strategies are examined and evaluated according to how well they may fulfill the dual mandate, considering the possibilities of a binding effective lower bound for the federal funds rate and a flatter Phillips curve. Nominal-GPD targeting has substantial both principal and practical disadvantages and is found to be inferior to the other strategies. Average-inflation targeting is found to have some advantages over the other strategies.
Keywords: No keywords provided
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forecast targeting (C53) | achievement of dual mandate (maximum employment and price stability) (E64) |
| forecast targeting (C53) | stabilization of inflation and employment (E63) |
| simple Taylor-type rule (C69) | inferior to forecast targeting (C53) |
| average inflation targeting (E31) | advantages over other strategies (L10) |
| nominal GDP targeting (E19) | substantial disadvantages (F11) |
| credibility of monetary policy strategies (E52) | necessary for achieving desired economic outcomes (P11) |
| binding effective lower bound (ELB) (K12) | implications for monetary policy strategies (E61) |
| flatter Phillips curve (E31) | implications for monetary policy strategies (E61) |