The Greenbook and U.S. Monetary Policy
IMF Working Papers, November 1, 2004
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- The Greenbook and U.S. Monetary Policy
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Bibliographic details
- Authors: Robert Tchaidze
- Published: November 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874976.001
Study objective and data
- Author: Robert Tchaidze
- Publication date: November 1, 2004
- Objective: Test for empirical evidence that U.S. monetary policy is forward looking and incorporates expected future developments rather than following a mechanical Taylor rule.
- Key data input: "Greenbook" forecast series calculated by the Federal Reserve staff, used to evaluate expected inflation shocks.
Method and approach
- Comparison of standard Taylor rules (mechanical responses of the policy interest rate to inflation and output gap) with specifications augmented by expected inflation shocks derived from Greenbook forecasts.
- Consideration of the possibility that policymakers have in mind a time-varying inflation target, implying potential misspecification of a simple Taylor rule.
Key findings
- Expected inflation shocks (from Greenbook forecasts) are significant in the estimated Taylor rule, confirming that policymaking is forward looking.
- A simple Taylor rule may be a misspecification if policymakers have a time-varying inflation target.
Policy implications and interpretation
- Monetary policy appears to respond to expected future developments (as captured by Greenbook forecasts), not only contemporaneous inflation and output gaps.
- Models of policy behavior should account for forward-looking information and allow for a potentially time-varying inflation target to avoid misspecification.
Subjects and keywords
- Subject: Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Real interest rates
- Keywords: Inflation, inflation response, inflation shock, Inflation targeting, lags-and-forecasts output gap estimate, Middle East, monetary policy, Output gap, output gap response, output gap shock, Real interest rates, real-time data, Taylor rule, WP
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- The Greenbook and U.S. Monetary Policy