Working Paper: NBER ID: w8603
Authors: Richard H. Clarida
Abstract: This paper was prepared as a Keynote Address for the ESRC Conference on the Future of Macroeconomics held at the Bank of England Conference Center on April 14, 2000. It uses the empirical framework for formulating and estimating forward looking monetary policy rules developed in Clarida, Gali, Gertler (1998; 1999; 2000;2001) and Clarida (2000) to assess what we know, don't know, and can't tell about monetary policy making in an open economy with an (implicit) inflation target. Among the issues discussed are: the relationship between structural VAR models of monetary policy and exchange rates and estimates of forward looking Taylor rules; the relationship between inflation targeting and leaning against the (exchange rate) wind; why central bankers are averse to even wide - band target zones; quantifying that stresses and costs of a one size fits all monetary policy for the members of a monetary union or currency bloc.
Keywords: No keywords provided
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive structural shock to monetary policy instrument (short-term interest rates) (E52) | Decline in production and sales (L23) |
| Positive structural shock to monetary policy instrument (short-term interest rates) (E52) | Appreciation of the currency (F31) |
| Positive structural shock to monetary policy instrument (short-term interest rates) (E52) | Slowdown in inflation (E31) |
| Central banks follow a forward-looking Taylor rule (E52) | Interest rates are adjusted based on expected future inflation and output gaps (E43) |
| Central banks raise interest rates during economic boom (E52) | Stabilizing behavior aimed at controlling inflation (E63) |
| Central banks lower interest rates during slumps (E52) | Stabilizing behavior aimed at controlling inflation (E63) |