Forward-Looking Rules for Monetary Policy

Abstract

This paper evaluates a class of simple policy rules that feed back from expected values of future inflation--inflation forecast-based rules. The rules are assessed by how well they perform when the economy is buffeted by a combination of shocks, whose distribution is drawn from the Bank of England forecasting model. It is shown that inflation forecast-based rules confer some real advantages: they embody explicitly monetary transmission lags; they potentially embody all information useful for predicting future inflation; and they can achieve a high degree of output smoothing. In the tests conducted these rules prove more efficient at minimizing inflation and output variability than standard Taylor rules, and almost as efficient as fully optimal rules.

JEL Classification: E52, E58