ABSTRACT
There is little reason to believe a monetary policy based primarily on expectations-sensitive forecasting indicators would be successful in the long run. Many economists and policymakers are convinced monetary policy can best contribute to maximum sustainable economic growth by delivering a stable price level or low and stable inflation. In 1976, Robert Lucas published a now-famous article arguing that the large-scale macroeconomic models then in vogue could, in principle, provide no useful information about the actual consequences of alternative monetary and fiscal policies, even though the models might be very good at short-term forecasting. The fact that monetary policy affects the economy with a lag means that central bankers have to make decisions today based on how they expect policy to affect output and inflation in the future. The policy regime is eclectic: policymakers look at many variables and different models to gauge the appropriate stance of policy and the degree of inflationary pressure.
