Flexible inflation targeting Monetary policy at the Stabilize - PDF document

Flexible inflation targeting Monetary policy at the � Stabilize inflation around the inflation target Riksbank and (2%) � Stabilize the real economy the Phillips curve p (resource utilization,output gap) (resource utilization output gap) � Minimize loss function ( λ > 0) Lars E.O. Svensson _ Sveriges Riksbank = π − π 2 + λ − 2 L ( *) ( y y ) t t t t Federal Reserve Bank of Boston, June 9-11 2008 1 2 2 Flexible inflation targeting Decision process � “Forecast targeting:” Choose an instrument- � 6-member Executive Board rate path such that the forecast of inflation � 6 policy decisions per year (3 reports, 3 updates) and resource utilization “looks good” � Interaction between staff and EB results in main and alternative combinations of forecasts of repo rate, alternative combinations of forecasts of repo rate, � “Looks good:” Inflation goes to target and � “Looks good:” Inflation goes to target and inflation, and real economy resource utilization goes to normal at � At final policy meeting EB discusses and votes on appropriate pace decision and report/update � Publish and motivate instrument-rate path and � Majority decision published day after policy decision forecast of inflation and real economy � Named minutes including any dissenting views � “Management of expectations” published 2 weeks after policy decision 3 3 4 Forecasts Mean forecasts, uncertainty intervals GDP Repo rate Annual percentage change Per cent 6 6 � Forecasts and simulations produced with 7 7 90% 90% 75% 75% 5 50% 5 6 50% 6 GDP Repo rate 4 4 5 5 � DSGE model (Ramses, since 2005) 4 4 3 3 3 3 2 2 � Bayesian VAR 2 2 1 1 1 1 0 0 � Other models (indicator, single-equation) Other models (indicator single eq ation) 0 0 -1 -1 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 CPI CPIX � Judgment Annual percentage change Annual percentage change 5 5 5 5 90% 90% 75% 75% 50% 50% � Mean forecasts, not mode 4 CPI 4 4 CPIX 4 3 3 3 3 � Uncertainty intervals 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 -1 -1 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 5 6 1

Ramses, Phillips curves Implications for policy � Discussion about alternative paths of repo rate, � Open-economy DSGE model (Adolfson, inflation, and real economy Laséen, Lindé, Villani) � Discussion more about future repo-rate paths than � Estimated with Bayesian methods current repo-rate level � AS block: New-Keynesian Phillips curves AS bl k i hilli � More medium and longer-term perspective M di d l i � More general-equilibrium perspective (domestic, consumer-goods import, � More systematic treatment of alternative assumptions investment-goods import, export) about (scenarios of) of exogenous variables, � Estimated instrument rule transmission mechanism, inflation expectations, etc. � Optimal policy (to be implemented) 7 8 Model and staff forecasts Alternative scenarios Repo rate CPIX CPIX Per cent Annual percentage change Repo rate 3.5 5 5 6 Annual percentage change 5 5 Per cent Outcome Outcome Outcome Outcome 3.0 Main scenario Staff forecast Main scenario Staff forecast 5 BVAR BVAR Greater financial turmoil 4 4 Greater financial turmoil 4 DSGE Ramses 4 DSGE Ramses 2.5 Higher international inflation Higher international inflation 4 2.0 3 3 3 3 3 1.5 2 2 2 2 2 1.0 1 0.5 1 1 1 1 0.0 0 0 0 03 04 05 06 07 08 09 10 11 0 0 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11 GDP growth 03 04 05 06 07 08 09 10 11 GDP growth Output gap Output gap Annual percentage change Percentage deviation from the HP trend Annual percentage change Percentage deviation from the HP trend 6 6 2.0 6 2.0 Outcome Outcome Outcome Outcome Main Scenario Staff forecast 1.5 1.5 Staff Forecast Main scenario 5 BVAR 5 5 Greater financial turmoil Ramses DSGE Ramses Greater financial turmoil 1.0 Higher international inflation 1.0 BVAR Higher international inflation 4 4 4 0.5 0.5 0.0 3 3 0.0 3 -0.5 -0.5 2 2 2 -1.0 -1.0 1 1 1 -1.5 -1.5 0 0 0 -2.0 -2.0 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 9 10 Deciding on a repo-rate path: Deciding on a repo-rate path: Just vote among a few alternatives Median path? CPIX Repo rate Annual percentage change Per cent 5 6 6 Repo rate Repo rate Outcome Main scenario Main scenario Lower interest rate 5 5 4 Lower interest rate Percent Percent Higher interest rate Higher interest rate 4 4 6 6 6 6 3 Outcome Outcome 3 3 Govenor 1 Govenor 1 5 5 5 5 2 Govenor 2 Govenor 2 2 2 Govenor 3 Govenor 3 4 4 4 4 1 1 1 3 3 3 3 0 0 0 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11 Output gap GDP growth 2 2 2 2 Percentage deviation from the HP trend Annual percentage change 2.0 5 Outcome 1 1 1 1 Outcome Main scenario 1.5 Main scenario Lower interest rate 4 Lower interest rate Higher interest rate 1.0 0 0 Higher interest rate 0 0 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11 0.5 3 0.0 2 -0.5 -1.0 1 -1.5 0 -2.0 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11 11 2

Decisions February 2007-April 2008 CPIX Repo rate Annual percentage change Per cent 5 5 3,5 3,5 Outcome Outcome MPR 07:1 MPR 07:1 3,0 3,0 MPR 07:2 MPR 07:2 4 4 MPR 07:3 MPR 07:3 MPU 07:4 MPU 07:4 2,5 2,5 MPM 08:1 MPM 08:1 MPM 08:2 3 MPM 08:2 3 2,0 2,0 1,5 1,5 2 2 1,0 1,0 1 1 0,5 0,5 0 0 0,0 0,0 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11 Output gap GDP growth Percentage deviation from the HP trend Annual percentage change 6,0 6,0 1,5 1,5 MPR 07:1 MPR 07:2 1,0 1,0 5,0 5,0 MPR 07:3 MPU 07:4 MPM 08:1 0,5 0,5 4,0 4,0 MPM 08:2 0,0 0,0 3,0 3,0 -0,5 -0,5 2,0 2,0 MPR 07:1 -1,0 -1,0 MPR 07:2 MPR 07:3 1,0 1,0 -1,5 MPU 07:4 -1,5 MPM 08:1 MPM 08:2 0,0 0,0 -2,0 -2,0 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11 12 3