Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States
IMF Working Papers, June 24, 2015
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- Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States
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Bibliographic details
- Authors: Ali Alichi, Kevin Clinton, Charles Freedman, Ondrej Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, Hou Wang
- Published: June 24, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513595702.001
Authors and publication
- By Ali Alichi, Kevin Clinton, Charles Freedman, Ondrej Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, Hou Wang
- June 24, 2015
- IMF Working Papers, Issue: 134; Series: Working Paper No. 2015/134
- Pages: 47
- Volume: 2015
- DOI: https://doi.org/10.5089/9781513595702.001
- Stock No: WPIEA2015134
- ISBN: 9781513595702
- ISSN: 1018-5941
Summary of central argument
- 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.
- An optimal control approach to monetary policy, including publication of a baseline forecast and a description of the uncertainties around that outlook, combined with improved communications, could further enhance the effectiveness of Fed policy.
- In the current conjuncture, such a risk management approach would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.
Key themes and analytical focus
- Central bank policy rate and FOMC policy rate forecast
- Inflation dynamics and measurement:
- Inflation equation
- Inflation expectation
- Inflation implication
- Inflation objective
- Inflation Targeting
- Monetary policy tools and design:
- Optimal Control approach
- Interest rate path and reaction function
- Forward guidance and communications toolkit
- Real economy interactions:
- Output gap
- Phillips curve
- Prices and production
- Real interest rates
- Policy action and risk management under a zero lower bound constraint
Main findings and implications
- Strengthened monetary framework and forward guidance have aided stimulus when policy rates are at zero.
- Publishing a baseline forecast plus uncertainties improves transparency and policy effectiveness.
- Combining an optimal control framework with enhanced communications leads to different policy timing and inflation dynamics:
- Later liftoff of policy rates
- A modest, but planned, overshooting of inflation
Policy recommendations
- Adopt an optimal control framework for monetary policy that:
- Publishes a baseline forecast.
- Describes the uncertainties around the baseline outlook.
- Improve the Fed’s communications toolkit to make forward guidance and risk-management approaches more effective.
- Use a risk management approach to guide timing of liftoff and allow deliberate, modest inflation overshooting when appropriate.
Source: IMF Working Paper "Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States", June 24, 2015.