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Economic Projections and Rules-of-Thumb for Monetary Policy

Author

Listed:
  • Athanasios Orphanides

    (Central Bank of Cyprus)

  • Volker Wieland

    (Goethe University Frankfurt)

Abstract
Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers’ forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that rely on outcomes may be due to systematic responses to information captured in policymakers’ own projections. We investigate in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections.

Suggested Citation

  • Athanasios Orphanides & Volker Wieland, 2008. "Economic Projections and Rules-of-Thumb for Monetary Policy," Discussion Papers 07-035, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:07-035
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    File URL: http://www-siepr.stanford.edu/repec/sip/07-035.pdf
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    References listed on IDEAS

    as
    1. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
    2. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
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    4. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2006. "A quantitative exploration of the opportunistic approach to disinflation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1877-1893, November.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary policy; forecasts; FOMC; policy rules;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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