Answer to Question #110415 in Macroeconomics for Sweta

Question

How is the forward looking monetary policy different from its backward looking counterpart?

Answer 1

Inflation targeting implies that monetary authorities seek to be forward-looking when deciding on policy, rather than responding to current or past conditions.There is a high probability that the slowdown in inflation over the past two months will be short-lived.A robust conclusion is that to ensure determinacy the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates. I. ... The celebrated Taylor (1993) rule posits that the central bank uses a fairly simple rule when conducting monetary policy.