Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States

By Ali Alichi, Kevin Clinton, Charles Freedman, Ondrej Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, Hou Wang

June 24, 2015

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Ali Alichi, Kevin Clinton, Charles Freedman, Ondrej Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, and Hou Wang. Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States, (USA: International Monetary Fund, 2015) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed’s communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.

Subject: Central bank policy rate, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Real interest rates

Keywords: Central bank policy rate, FOMC policy rate forecast, Global, Inflation, Inflation equation, Inflation expectation, Inflation implication, Inflation objective, Inflation Targeting, Interest rate path, Monetary Policy, Optimal Control, Output gap, Phillips curve, Policy action, Reaction function, Real interest rates, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/134
Stock No:

WPIEA2015134
ISBN:

9781513595702
ISSN:

1018-5941

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