Answer to Question #108998 in Macroeconomics for Esmat Asem

Question

how is the forward looking monetary policy different from its backward looking counterpart? what is the divine coincidence and why is it difficult to implement?

Answer 1

The forward looking monetary policy is based on analysis of inflation. However, backward looking monetary policy is based on analysis of a flexible price economy and a sticky price model. The divine coincidence refer to the property of New Keynesian models that there is no trade-off between the stabilization of inflation and the stabilization of the welfare-relevant output gap for central bank. Divine coincidence cannot be implemented because it is just a coincidence.