Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States
June 24, 2015
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Summary
The Fed has taken several steps towards strengthening its monetary framework over the past several years. Those steps have supported the Fed’s efforts to stimulate the economy through forward guidance despite being constrained by having policy rates at zero. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed’s communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.
Subject: Central bank policy rate, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Real interest rates
Keywords: Central bank policy rate, FOMC policy rate forecast, Global, Inflation, inflation equation, inflation expectation, inflation implication, inflation objective, Inflation Targeting, interest rate path, Monetary Policy, Optimal Control, Output gap, Phillips curve, policy action, reaction function, Real interest rates, WP
Pages:
47
Volume:
2015
DOI:
Issue:
134
Series:
Working Paper No. 2015/134
Stock No:
WPIEA2015134
ISBN:
9781513595702
ISSN:
1018-5941
