DP14247 Monetary Policy Strategies for the Federal Reserve

Author(s): Lars E.O. Svensson
Publication Date: December 2019
Keyword(s):
JEL(s): E52, E58
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14247

The paper finds that the general monetary policy strategy of "forecast targeting" is more suitable for fulfilling the Federal Reserve's dual mandate of maximum employment and price stability than following a simple "instrument" rule such as a Taylor-type rule. Forecast targeting can be used for any of the more specific strategies of annual-inflation targeting, price-level targeting, temporary price-level targeting, average-inflation targeting, and nominal-GDP targeting. These specific strategies are examined and evaluated according to how well they may fulfill the dual mandate, considering the possibilities of a binding effective lower bound for the federal funds rate and a flatter Phillips curve. Nominal-GPD targeting has substantial both principal and practical disadvantages and is found to be inferior to the other strategies. Average-inflation targeting is found to have some advantages over the other strategies.