Inflation forecast-based rules outperform standard policies, smoothing economic fluctuations efficiently.
The paper looks at simple rules for monetary policy that use expected future inflation to make decisions. These rules are tested with different economic shocks to see how well they work. The study finds that these rules have advantages: they consider delays in how monetary policy affects the economy, they use all available information to predict inflation, and they can help smooth out fluctuations in output. In tests, these rules are better at reducing inflation and output variability compared to standard rules, and almost as good as fully optimal rules.