Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability

Svensson, Lars E. O.

doi:10.2139/ssrn.174380

Cited by 28 publications

(33 citation statements)

References 69 publications

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“…Evidence from the last decade undoubtedly puts policy, that is based on forecasts and judgment but, in addition, is constrained by a more explicit objective and explained in a transparent way, in a much better light. 19 In cases when the assumptions of a linear model and quadratic loss function are not fulfilled, as discussed in Svensson [46] and [50], one can still apply "distribution forecast targeting," where the forecasts are explicit probability distributions and the intertemporal loss function is the explicit or implicit integral over those distributions. 20 Bank of England and the Riksbank do not publish graphs of mean (that is, probability-weighted average) forecasts in their Inflation Reports but rather of mode (that is, maximum probability) forecasts, with "fan charts" and confidence intervals illustrating the probability distribution.…”

Section: Forecast Targetingmentioning

confidence: 99%

Monetary Policy and Real Stabilization

Svensson¹

2003

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Monetary policy can achieve average inflation equal to a given inflation target and, at best, a good compromise between inflation variability and output-gap variability. The complex transmission mechanism, varying lags and strength of the effects through different channels, unpredictable shocks and inherent uncertainty prevent any fine-tuning. Monetary policy cannot completely stabilize either inflation or the output gap. Increased credibility in the form of inflation expectations anchored on the inflation target will reduce the variability of inflation and the output gap.Central banks can improve transparency and accountability by specifying not only an inflation target but also the dislike of output-gap variability relative to inflation variability. This will better focus the work inside the bank, allow more precise external monitoring and evaluation of monetary policy, and allow more precise scrutiny and debate about the monetary-policy objectives.Central banks can best achieve both the long-run inflation target and the best compromise between inflation and output-gap stability by engaging in "forecast targeting," where at each major monetary-policy decision, the bank selects the feasible combination of inflation and output-gap projections that minimize the loss function and the corresponding instrument-rate plan and sets the instrument-rate accordingly. Announcing and motivating these forecasts maximize the impact on private-sector expectations and the economy and make the implementation of policy most effective. This allows the most effective external monitoring and evaluation of the policy, and thereby creates the strongest incentives for the bank to conduct policy according to the announced objectives. It also allows precise debate about the monetary-policy objectives. Forecast targeting implies that the instrument responds to all information that significantly affects the projections of inflation and the output gap. Therefore it cannot be expressed in terms of a simple instrument rule, like a Taylor rule.Financial stability, including a well-functioning payment system, is an important additional objective for the central bank. This objective can conveniently be considered as a restriction on monetary policy that does not bind in normal times, but does bind in times of financial crises. By producing and publishing Financial Stability Reports with indicators of financial stability, the central bank can monitor the degree of financial stability and issue warnings to concerned agents and authorities in due time and this way avoid deteriorating financial stability.Forecast targeting implies that asset-price developments and potential asset-price bubbles are taken into account and responded to the extent that they are deemed to affect the projections of the target variables, inflation and the output gap. In most cases, it will be difficult to make precise judgments, though, especially to identify bubbles with reasonable certainty.The zero bound, liquidity traps and risks of deflation are serious concer...

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Section: Forecast Targetingmentioning

confidence: 99%

Monetary Policy and Real Stabilization

Svensson¹

2003

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“…Under Friedman's notion of a clean float, the country's central bank gears its monetary management exclusively to the domestic price level -or as a surrogate, inflation, an arguably inferior goal [126]. Under more eclectic notions, the clean float concept extends to all closed economy goals of an economy.…”

Section: Its Domestic Price Orientationmentioning

confidence: 99%

Managed Floats to Damp World-Wide Exchange Rate Liquidity Shocks Like 1982-5, 2006-9: Field and Laboratory Evidence for the Benefits of a Single World Currency

Pope¹

2011

TOECONSJ

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“…As far as the disadvantages of adopting a simple monetary policy rule are concerned, Svensson (1999aSvensson ( , 1999c argues that a commitment to a simple instrument rule does not leave any possibility for judgmental adjustments and extra-model information. He concludes that for both of these reasons, a commitment to an instrument rule would be inefficient.…”

Section: Operationality/simplicitymentioning

confidence: 99%

Interest-Rate Rules in a New Keynesian Framework with Investment

Pavlova¹

2011

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Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability

Cited by 28 publications

References 69 publications

Monetary Policy and Real Stabilization

Monetary Policy and Real Stabilization

Managed Floats to Damp World-Wide Exchange Rate Liquidity Shocks Like 1982-5, 2006-9: Field and Laboratory Evidence for the Benefits of a Single World Currency

Interest-Rate Rules in a New Keynesian Framework with Investment

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