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Forecasts and sunspots: looking back for a better future

Author

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  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

To head off inflation before it gets started, central banks must use forecasts to determine monetary policy actions. But doing so introduces the possibility that inflation will increase just because the public expects it to. This Economic Commentary explains how random events (sunspots) can affect economic systems and create price volatility. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation.

Suggested Citation

  • Charles T. Carlstrom & Timothy S. Fuerst, 1999. "Forecasts and sunspots: looking back for a better future," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
    • Handle: RePEc:fip:fedcec:y:1999:i:nov
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    Cited by:

    1. Mark Weder, 2006. "Interest rate rules and macroeconomic stabilization," Recherches économiques de Louvain, De Boeck Université, vol. 72(2), pages 195-204.
    2. Mark Weder, 2004. "Taylor Rules: intercepting expectations," Money Macro and Finance (MMF) Research Group Conference 2003 110, Money Macro and Finance Research Group.
    3. Weder, Mark, 2003. "Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations," CEPR Discussion Papers 3899, C.E.P.R. Discussion Papers.

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