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Inter-forecast monetary policy implementations : fixed-instrument versus MCI-based strategies

Benjamin Hunt

Monetary policy authorities can adjust their instrument at any point in time to achieve their policy objective. In some countries, such as the United States and the United Kingdom, policymakers choose to usually make adjustments only after a formal medium-term inflation forecast. Other countries, like Canada and New Zealand, have used simple inter-forecast strategies to make further instrument adjustments given unexpected developments in the exchange rate. These alternative strategies may be usefully thought of as fixing or banding a measure of "monetary conditions" that is comprised of the exchange rate and a short-term interest rate that is closely linked to the policy instrument. Such measures have come to be referred to as Monetary Conditions Indices (MCI).