DP14247 Monetary Policy Strategies for the Federal Reserve
|Author(s):||Lars E.O. Svensson|
|Publication Date:||December 2019|
|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.