Monetary policy rules and a normative approach to the central bank’s objective function
AbstractThis study attempts to explain in an understandable manner that the central bank’s effort to keep inflation low is not an end in itself, but ultimately serves the interests of social welfare. We attempt to substantiate this argument on the basis of economic theory, based on the logic of New Keynesian models, by describing loss functions that contain welfare relevant variables and interest rules that minimise them. By using this framework, we point out that – taking into account the limits of measurability, learning and potentially non-rational expectations – decision-making rules that give considerable weight to a departure from the inflation target and take into account real economy considerations generally perform well in terms of welfare and may be considered robust in New Keynesian-type models with forward looking agents. Finally, we argue that through the strategy of inflation targeting the normative implications of the above framework can be put into practice.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.
Volume (Year): 2 (2007)
Issue (Month): 2 (November)
New_keynesian model; inflation targeting; normative approach.;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanna Jeney).
If references are entirely missing, you can add them using this form.