Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target…
# Inflation Forecasts and Monetary Policy
> OpenAlex Metadata Hub · https://openalex.org/W3122270349
## Bibliographic
- **DOI:** 10.3386/w6157
- **Year:** 1997
- **Citations:** 424
- **Open Access:** Yes (green)
- **License:** —
- **Source:** https://doi.org/10.3386/w6157
## Authors
- Ben Bernanke
- Michael Woodford
## Abstract
Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply, we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium, and that policies approximating strict inflation-forecast targeting are likely to have undesirable properties. We also show that economies with more general forecast-based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria. We conclude that, although private-sector forecasts may contain information useful to the central bank, ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions.
## Keywords
Monetary policy, Inflation (cosmology), Economics, Monetary economics, Keynesian economics, Physics
## Concepts
- Monetary policy
- Inflation (cosmology)
- Economics
- Monetary economics
- Keynesian economics
- Physics
- Theoretical physics
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*Metadata only — full text not imported unless Open Access license permits.*
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Tóm lược học thuật (đã diễn giải): Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply, we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium, and that policies approximating strict inflation-forecast t…
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1. Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target.
2. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices.
3. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions.
4. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply, we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium, and that policies approximating strict inflation-forecast targeting are likely to have undesirable properties.
5. We also show that economies with more general forecast-based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria.
6. We conclude that, although private-sector forecasts may contain information useful to the central bank, ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions.
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