Question

How is the forward looking monetary policy different from its backward looking counterpart? What is the 'divine coincidence' and why is it difficult to implement explain  in details?

Answer 1

Forward looking monetary policy refers to policy making strategy targetting specific level of inflation in the future without worrying about historic trend whereas the backward looking policy looks upon the stickiness of the prices (Wages remains high even if there is slowdown/ unemployment) it decides upon the interest rate basis historic inflation trends.

Divine coincidence refers to situation where we need not keep seperate targets for inflation and output and controlling inflation would also control the output gap ( difference between actual and efficient). In general it is difficult to implement since both are independent factor where if one wants to control inflation growth rate slows down and vice versa. so, targetting to control inflation and bringing it down will result in lower growth which is not generally the policy objective. Hence, this is termed as coincidence which is difficult to implement