Abstract

Some Lessons of Monetary Management

Many central banks rely on forecasts to make discretionary changes in monetary and fiscal policies. Much recent research suggests that some type of adaptive rule that exploits available data increases efficiency by increasing the predictability of policy actions and the pace of economic activity. The paper takes an empirical approach. Forecast errors from private and public forecasts are presented. A principal finding, for all countries and time periods considered, is that the forecasts errors are so large relative to mean changes that forecasters are unable to predict, on average, whether the economy will be in a boom or a recession in the next year or quarter. The paper also compares the size of unanticipated changes in six countries under fixed and fluctuating exchange rates. The principal finding is that, contrary to common assertions, several countries have had less variability of prices and output during the fluctuating exchange rate regime. Based on these findings, an adaptive rule is suggested to reduce variability in prices, exchange rates, and economic activity.