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On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach

De Grauwe, Paul and Ji, Yuemei (2022) On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach. Oxford Economic Papers. ISSN 0030-7653

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Identification Number: 10.1093/oep/gpac024

Abstract

We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation targeting (SIT) regime, the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime, because the first regime creates more extreme movements in output and inflation than the second one. We also find that nowcasting tends to improve the quality of monetary policy, especially in a SIT regime. Finally, we provide a case study of monetary policies in the USA and the eurozone during 2000–20.

Item Type: Article
Official URL: https://academic.oup.com/oep
Additional Information: © 2022 The Authors
Divisions: European Institute
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
Date Deposited: 13 Jul 2022 10:33
Last Modified: 09 Sep 2022 11:09
URI: http://eprints.lse.ac.uk/id/eprint/115547

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