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.