Comment on Woodford--Taylor--Dallas--2007

The Dual Nature of Forecast Targeting and Instrument Rules: A Comment on Michael Woodford’s “Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice” John B. Taylor Stanford University Presented at the Federal Reserve Bank of Dallas Conference October 13, 2007 I thank Michael Woodford for writing such a thoughtful and useful paper on monetary policy. It is filled with fascinating ideas and insights, each carefully explained. As befits this final “Looking Ahead” session of the conference, he proposes an ambitions future research program with the specific practical purpose of implementing “forecast targeting” by central banks. The Proposed Monetary Policy Research Program By forecast targeting Michael Woodford means a policy framework in which monetary policy makers choose their policy instruments so that the expected future values of certain target variables are related to each other in every future period. For example, the forecast of an optimally-chosen linear combination of the inflation rate and the GDP gap, or the change in the gap, would be made equal to zero by choosing the 1instruments of policy appropriately. 1 In the models Woodford considers, the level of the gap appears in the case of the “discretionary” solution to the optimization problem, while the change in the GDP gap appears in the case of the “optimal” solution. I agree that the latter solution ...