Practical Issues in Monetary Policy Targeting

Abstract

This chapter outlines the type of information monetary policymakers need in practice, and to examine the data to see what we actually know. While most economists would agree that monetary policy has real short-run effects and is most likely neutral in the long run, they could provide no more than informed speculation in helping decide at what level to set the target for a policy instrument and when to change it. The next stage in devising a monetary rule is to link the operating instrument with the target. This requires specification and estimation of a macroeconomic model. Finally, policymakers need a timely estimate of their target variable’s future path in the absence of any policy actions. In other words, they must know when external shocks hit the economy, how large they are, and what their impact on the time path of aggregate prices and real output will be.

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