Front Matter

Front Matter

Tobias Adrian, Douglas Laxton, and Maurice Obstfeld
Published Date:
April 2018
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Tobias Adrian, Douglas Laxton, and Maurice Obstfeld, Editors

Authors: Tobias Adrian, Rania Al-Mashat, Rahul Anand, Andrew Berg, Kevin Clinton, Giovanni Dell’Ariccia, Fernando Duarte, Federico Grinberg, Vikram Haksar, Darryl King, Douglas Laxton, Tommaso Mancini-Griffoli, Maurice Obstfeld, Rafael Portillo, and Hou Wang


© 2018 International Monetary Fund

Cover design: Jessie Sanchez Art & Design

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: Adrian, Tobias, editor. | Laxton, Douglas, editor. | Obstfeld, Maurice, editor. | International Monetary Fund.

Title: Advancing the frontiers of monetary policy / Tobias Adrian, Douglas Laxton, and Maurice Obstfeld, editors ; authors: Tobias Adrian [and eleven others].

Description: Washington, DC : International Monetary Fund, 2018 | Includes bibliographical references.

Identifiers: ISBN 9781484325940 (Paper) | 9781484344484 (ePub) | 9781484344491(Mobipocket) | 9781484344521 (PDF)

Subjects: LCSH: Monetary policy. | Inflation targeting.

Classification: LCC HG230.3.E96 2018

Disclaimer: The views expressed in this book are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or management.

Recommended citation: Adrian, Tobias, Douglas Laxton, and Maurice Obstfeld, eds. 2018. Advancing the Frontiers of Monetary Policy. Washington, DC: International Monetary Fund.

ISBN 978-1-48432-5940 (Paper)

978-1-48434-4484 (ePub)

978-1-48434-4491 (Mobipocket)

978-1-48434-4521 (PDF)

Please send orders to:

International Monetary Fund, Publication Services

P.O. Box 92780, Washington, DC 20090, U.S.A.

Tel.: (202) 623–7430 Fax: (202) 623–7201




Inflation is no longer a problem that dominates people’s minds these days. Other economic issues in 2018 have a far higher profile in the public debate—employment, trade, technological change, industrial restructuring, inequality, aging populations, and sluggish growth, to name a few. Yet in the 1970s and 1980s, inflation was a first-order problem. The change followed the emergence of a consensus that the main objective of monetary policy is to establish a low, stable rate of inflation. In line with this, many countries have adopted an explicit numerical target—2 percent is popular—as the basis for monetary policy.

New Zealand led the way in the late 1980s, using inflation targeting as an initiative to end its chronic and severe inflation problem. Canada soon followed. The priority in the early years was to establish the credibility of the initial targets among a skeptical public. Policymakers, therefore, set interest rates high enough to make sure that they achieved, or overachieved, the initial targets. Despite outspoken criticism of the high interest rates and the losses of output and employment that followed, the inflation targeters stood their ground. By the mid-1990s, disinflation was sufficient to grab the attention of the public and to lead the way to a permanent decline in inflation expectations. Meanwhile, the losses of output proved to be temporary—just as the theory of the expectations-augmented Phillips curve had predicted. Other countries noticed, and by the turn of the century numerous central banks were pursuing an inflation target.

Within a few years they had broadly established confidence in stable long-term inflation. Shocks to the inflation rate over which monetary policy has no effective control, for example, from sudden changes in energy prices, no longer shifted long-term expectations. Policymakers could now adopt a more flexible approach in responding to disturbances to the rate of inflation with more weight on stabilizing the level of output. Flexible inflation targeting would allow a one-off change in the inflation rate to accommodate the relative price change, but not a lasting change. A consistent policy that returns inflation to a steady low rate over the medium term is the ultimate foundation for public confidence in this outcome. In a seminal contribution, Lars Svensson proposed for this purpose that central banks aim at achieving their own forecast of the inflation path. Inflation-forecast targeting provides, in effect, a systematic way to implement the otherwise vague notion of flexible inflation targeting.

For a good number of years before 2008 the framework worked well, avoiding recessions and keeping inflation on track. The record since the 2008–09 global financial crisis has, however, been disappointing. The response of monetary policy to subpar output and below-target inflation has been stymied by the effective lower bound on the nominal interest rate (a number near zero). The situation calls for coordinated deployment of all relevant policies, in particular fiscal stimulus, where the public sector balance sheet is in good shape, and structural reforms, including strengthening financial systems and deploying macroprudential tools. The authors of this volume nevertheless argue that monetary policy can make a positive contribution. Management of expectations is the core of the matter. To this end, they recommend increased central bank transparency with respect to economic forecasts, and more assertive policy actions.

More generally, the book considers how to structure an inflation-forecast-targeting regime that will work well in good and bad times. It describes how policymakers might systematically formulate responses to inflation shocks, with due regard to the consequences for output. Moreover, the book introduces a novel rationale for taking financial conditions into account when setting monetary policy, and looks more broadly at effective operational frameworks and communication strategies. The authors draw on contributions they have made to the practice of inflation-forecast targeting. Their experience at central banks in advanced and emerging market economies as well as in low-income countries gives their analysis a pragmatic viewpoint. They use model simulations along with case studies to illustrate their arguments. At the same time, the treatment of the issues is not highly technical and remains accessible to a wide audience, including central bankers and other policymakers, business journalists, financial market analysts, and students.

Carla Grasso

Deputy Managing Director and Chief Administrative Officer

International Monetary Fund


This book was based, to a large extent, on our experience working with a large number of central banks on their inflation-forecast-targeting frameworks. Rania Al-Mashat, Ali Alichi, Michal Andrle, Jaromir Benes, Andrew Berg, Aleš Bulíř, Kevin Clinton, Aaron Drew, Charles Freedman, Tibor Hlédik, Tomás Holub, Benjamin Hunt, Tore Anders Husebø, Ondra Kamenik, Joannes Mongardini, Rafael Portillo, David Rose, Jack Selody, David Vávra, Hou Wang, Jiaxiong Yao, and Fan Zhang, among others, provided important contributions on technical assistance missions. Rebecca Eyassu, Yiqun Li, and Cristina Quintos provided excellent administrative and research assistance. We would also like to thank Olivier Blanchard, Jorg Decressin, and Gian Maria Milesi-Ferretti for encouraging us to complete this project. Linda Griffin Kean in the Editorial and Publications Division of the IMF’s Communications Department oversaw the editing and production of this book.



Czech National Bank


consumer price index


dynamic stochastic general equilibrium


US Federal Reserve System


forecasting and policy analysis system


growth at risk


inflation-forecast based


personal consumption expenditures


quarterly projection model


Reserve Bank of India


value at risk


vector autoregression



Tobias Adrian is the Financial Counsellor and the Director of the Monetary and Capital Markets Department of the IMF. Before joining the IMF in January 2017, he served as Senior Vice President and Associate Director of Research at the Federal Reserve Bank of New York, where he helped lead the New York Fed’s work on financial stability policy and monetary policy. He previously conducted economic research at the National Bureau of Economic Research in Cambridge, Massachusetts, and at the Centre for European Policy Studies in Brussels. He earned his PhD in economics from the Massachusetts Institute of Technology (MIT) and his MSc from the London School of Economics and Political Science. He also earned postgraduate degrees from Goethe University in Frankfurt and Dauphine University in Paris. He taught economics at MIT, Princeton University, and New York University. His economic analyses have been published in such scholarly journals as the American Economic Review, Journal of Financial Economics, and Journal of Finance.

Douglas Laxton is the Division Chief of the Economic Modeling Division in the Research Department of the IMF, which develops modern macro models to support the IMF’s surveillance activities. He joined the IMF’s Research Department in 1993 and has held numerous positions, including Advisor to the IMF’s Economic Counsellor. He has worked with many central banks developing forecasting and policy analysis systems to support inflation-forecast targeting frameworks. He has written on a wide range of topics but focuses his time on building multicountry models, including, more recently, models with strong macro-financial linkages designed to support macroprudential policies. He has also developed models of the oil market to support the IMF’s surveillance activities. Prior to joining the IMF, Mr. Laxton held numerous positions in the Research Department at the Bank of Canada (1981–93) and was responsible for developing its modeling framework to support inflation targeting. Mr. Laxton completed graduate work in economics in 1981 at the University of Western Ontario. For more details see

Maurice Obstfeld has been the Economic Counsellor and Director of Research of the IMF since September 2015, on leave from the University of California, Berkeley. At Berkeley, he is the Class of 1958 Professor of Economics and former Chair of the Department of Economics (1998–2001). He arrived at Berkeley in 1991 as a professor, following permanent appointments at Columbia (1979–86) and the University of Pennsylvania (1986–89), and a visiting appointment at Harvard University (1989–90). He received his PhD in economics from MIT in 1979 after attending the University of Pennsylvania (BA, 1973) and King’s College, Cambridge University (MA, 1975). From July 2014 to August 2015, Dr. Obstfeld served as a member of President Obama’s Council of Economic Advisers. He was previously an honorary advisor to the Bank of Japan’s Institute of Monetary and Economic Studies (2002–14). He is a Fellow of the Econometric Society and the American Academy of Arts and Sciences. Among Dr. Obstfeld’s honors are Tilburg University’s Tjalling C. Koopmans Asset Award, the John von Neumann Award of the Rajk Laszlo College for Advanced Studies (Budapest), and the Kiel Institute’s Bernhard Harms Prize. He has delivered a number of distinguished lectures, including the American Economic Association’s annual Richard T. Ely Lecture, the L. K. Jha Memorial Lecture of the Reserve Bank of India, and the Frank D. Graham Memorial Lecture at Princeton University. Dr. Obstfeld has served on the Executive Committee and as Vice President of the American Economic Association. He has consulted and taught at the IMF and numerous central banks around the world. He is also the coauthor of two leading textbooks on international economics, International Economics (10th edition, 2014, with Paul Krugman and Marc Melitz) and Foundations of International Macroeconomics (1996, with Kenneth Rogoff), as well as more than 100 research articles on exchange rates, international financial crises, global capital markets, and monetary policy.


Rania Al-Mashat is an Advisor in the IMF’s Research Department. In this position, she has made significant contributions to the technical assistance and capacity development work of the Research Department, leading technical assistance missions to central banks in various regions and engaging in several outreach activities. She has worked on a number of research projects, focusing on, among other topics, financial stability, potential output, and central bank transparency. These responsibilities tap her years of experience serving as Sub-Governor for Monetary Policy at the Central Bank of Egypt (2005–16). During her tenure, she helped modernize the bank’s monetary policy strategy and manage the country’s macroeconomic transition, and acted as the primary liaison between the central bank and the IMF. She has had several board affiliations, including with the Egyptian Stock Exchange, the General Authority for Free Zones and Investment in Egypt, the Arab International Bank, the Middle East Economic Association, and the Arab Investment Bank. Prior to joining the Central Bank of Egypt, she was a Senior Economist at the IMF and covered a number of emerging Asian economies, including India and Vietnam, with research focused on monetary policy formulation and transmission as well as structural reforms. She has received numerous awards and recognitions for her research efforts and contributions to public work, including being selected a Young Global Leader by the World Economic Forum and chosen to be a part of their Expert Network in 2017, and being selected among the top 50 most influential women in the Egyptian economy during 2015. She is a member of Bruegel’s scientific council and a Research Fellow at the Economic Research Forum for the Arab countries, Iran, and Turkey. She was a lecturer at the Egyptian Banking Institute and an adjunct professor of economics at the American University in Cairo. She holds a PhD in economics from the University of Maryland.

Rahul Anand is Assistant to the Director in the IMF’s Institute for Capacity Development. He previously worked in the African Department and the Asia and Pacific Department, covering South Africa, India, and Sri Lanka. His research spans a range of areas, including general equilibrium modeling to study monetary policy issues in emerging markets, macro-critical structural reforms, subsidy reforms, and growth-enhancing structural transformation. Before joining the IMF in 2010, he held various senior positions in India as a member of the Indian Administrative Service designing, implementing, and monitoring government economic programs and policies. He holds a PhD from Cornell University and a master’s degree from Harvard University.

Andrew Berg is Deputy Director of the IMF’s Institute for Capacity Development. He holds a PhD in economics from MIT and an undergraduate degree from Harvard University. He first joined the IMF in 1993, and most recently served in the Research Department as Chief of the Development Macroeconomic Division and before that in the African Department, including as Chief of the Regional Studies Division and as Mission Chief to Malawi. He has also worked at the US Treasury and as an associate of Jeffrey Sachs. He has published articles on, among other topics, growth accelerations, the macroeconomics of aid, predicting currency crises, inequality and growth, public investment and debt sustainability, artificial intelligence and inequality, and monetary policy in low-income countries.

Kevin Clinton works as a consultant for the IMF and the World Bank, following a long career as Research Adviser at the Bank of Canada, in departments responsible for monetary policy modeling and strategy, financial markets and policy implementation, and international issues. Since 1990 he has participated in technical assistance missions to central banks in Asia, the Caribbean, Central and Eastern Europe, and South America. His recent publications, coauthored with teams led by Douglas Laxton, focus on the implementation of inflation-forecast targeting. Earlier articles are published in various journals, including the American Economic Review, Canadian Journal of Economics, Journal of Finance, Journal of Political Economy, and in various Bank of Canada publications. Mr. Clinton studied at the London School of Economics, and completed a PhD at Western University; he has taught at the University of Maryland, Queen’s, and Carleton.

Giovanni Dell’Ariccia is Deputy Director of the IMF’s Research Department. He supervises the department’s work on financial, macroprudential, and monetary policy issues, including the activities of the Macro-Financial Division. Previously, he worked in the Asia and Pacific Department on assignments on Thailand, Singapore, and Hong Kong Special Administrative Region. He received his undergraduate degree in economics from Sapienza Università di Roma and a PhD in economics from MIT. His research interests include banking, the macroeconomics of credit, monetary policy, international finance, and conditionality in international lending and aid programs. He has published extensively in major economics and finance journals on issues ranging from bank competition under asymmetric information to credit booms and the relationship between monetary policy and bank risk-taking. He is a Research Fellow at the Centre for Economic Policy Research.

Fernando Duarte is an Economist in the Capital Markets Function at the Federal Reserve Bank of New York, with main research interests in inflation, asset pricing, and the connections between macroeconomics and finance. He obtained his PhD in economics from MIT in 2011.

Federico Grinberg is an Economist in the Monetary and Capital Markets Department of the IMF, working on monetary policy. He previously worked in the IMF’s European Department. He earned a PhD in economics from the University of California, Los Angeles, in 2015, and holds a BSc in economics from the University of Buenos Aires, Argentina.

Vikram Haksar is an Assistant Director in the IMF’s Strategy Policy and Review Department. In this role, he manages work on global surveillance and Group of 20 prospects and the IMF’s engagement on finance and technology. He was previously the IMF’s Mission Chief for Brazil and Mexico, leading the team that set up the IMF’s $70 billion flexible credit line agreement with Mexico in 2009. He earlier worked on emerging market economies in Asia and Eastern Europe and was the IMF’s Resident Representative in the Philippines. He received his PhD from Cornell University.

Darryl King is the Deputy Division Chief of the Central Bank Operations Division of the Monetary and Capital Markets Department of the IMF. He previously managed the implementation of monetary and foreign exchange policies at the Reserve Bank of New Zealand and was a member of the Monetary Policy Committee. Since joining the IMF in the late 1990s he has worked extensively with central banks in the areas of monetary and foreign exchange operations, market development, and financial stability. He is also involved in policy work and is one of the authors of the 2015 IMF paper “Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries,” and recently led a team that developed a framework for central bank intervention in securities markets.

Tommaso Mancini-Griffoli is a Deputy Division Chief in the Monetary and Capital Markets Department of the IMF, in charge of work on monetary policy. He has advised country authorities and published on issues related to unconventional monetary policies, monetary policy spillovers, exchange rate regimes and interventions, and evolving monetary policy frameworks. Prior to joining the IMF, he was a Senior Economist in the Research and Monetary Policy Division of the Swiss National Bank, where he advised the Board on quarterly monetary policy decisions. He spent prior years in the private sector at Goldman Sachs, the Boston Consulting Group, and technology start-ups in Silicon Valley. He holds a PhD from the Graduate Institute in Geneva, a master’s from the London School of Economics, and a bachelor’s from Stanford University.

Rafael Portillo has worked in the Western Hemisphere, Monetary and Capital Markets, African, and Research Departments of the IMF. From 2016–17 he worked at the Joint Vienna Institute. His work has focused on macroeconomic modeling and monetary policy issues through surveillance, research, and technical assistance. Mr. Portillo has coauthored several IMF policy papers, working papers, and academic publications. He received his PhD in economics in 2006 from the University of Michigan and also holds degrees from the Université Paris I Panthéon-Sorbonne and the Université Paris IX Dauphine.

Hou Wang is an Economist in the Research Department of the IMF. Since she joined the IMF, she has worked with many central banks developing models to support inflation-forecast-targeting frameworks. She has also worked on multi-country dynamic stochastic general equilibrium models to support the IMF’s surveillance activities. She holds a PhD in economics from the Johns Hopkins University.

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