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Inflation Targeting and the Role of Real Objectives

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  • Carl Walsh

Abstract

In this paper, I focus on two aspects of central banking – flexibility and transparency – that have been affected by monetary policy debates over the past twenty years. Because criticism of inflation targeting, at least in the United States, often focuses on the claim that an inflation targeting central bank may ignore real economic fluctuations, I direct my comments to the role real objectives play in the design of optimal monetary policy. That is, I focus on how flexible the central bank should be. I argue that, while the recent trend in the academic literature to view central bank objectives as derived from the welfare of the representative agent can be insightful, this perspective is not the only one for thinking about the goals assigned to the central bank. There are reasons why the objectives of a central bank should, potentially, deviate from social welfare, and I will focus on two such reasons; one related to imperfect monitoring and accountability, the other arising from asymmetric information.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Research and Policy Notes with number 2007/02.

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Date of creation: Dec 2007
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Handle: RePEc:cnb:rpnrpn:2007/02

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Keywords: Central Banks; Monetary Policy; Inflation Targeting.;

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References

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  1. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2007. "Welfare-maximizing monetary policy under parameter uncertainty," Proceedings, Federal Reserve Bank of San Francisco.
  2. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," Working Paper 2004-22, Federal Reserve Bank of Atlanta.
  3. Camille Cornand & Frank Heinemann, 2008. "Optimal Degree of Public Information Dissemination," Economic Journal, Royal Economic Society, vol. 118(528), pages 718-742, 04.
  4. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  5. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  6. N. Nergiz Dincer & Barry Eichengreen, 2007. "Central Bank Transparency: Where, Why, and with What Effects?," NBER Working Papers 13003, National Bureau of Economic Research, Inc.
  7. Svensson, Lars E. O. & Woodford, Michael, 2001. "Indicator Variables for Optimal Policy under Asymmetric Information," Seminar Papers 689, Stockholm University, Institute for International Economic Studies.
  8. Richard Dennis, 2003. "New Keynesian optimal-policy models: an empirical assessment," Working Paper Series 2003-16, Federal Reserve Bank of San Francisco.
  9. Antonio Fatas & Ilian Mihov & Andrew K. Rose, 2004. "Quantitative Goals for Monetary Policy," NBER Working Papers 10846, National Bureau of Economic Research, Inc.
  10. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
  11. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  12. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  13. Geraats, P.M., 2004. "Transparency and Reputation: The Publication of Central Bank Forecasts," Cambridge Working Papers in Economics 0473, Faculty of Economics, University of Cambridge.
  14. Eijffinger, S.C.W. & Geraats, P.M., 2004. "How Transparent Are Central Banks?," Cambridge Working Papers in Economics 0411, Faculty of Economics, University of Cambridge.
  15. Faust, Jon & Svensson, Lars E O, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," CEPR Discussion Papers 2195, C.E.P.R. Discussion Papers.
  16. Temple, Jonathan, 1998. "Central bank independence and inflation: good news and bad news," Economics Letters, Elsevier, vol. 61(2), pages 215-219, November.
  17. Ravenna, Federico & Walsh, Carl E., 2008. "Vacancies, unemployment, and the Phillips curve," European Economic Review, Elsevier, vol. 52(8), pages 1494-1521, November.
  18. Vega, Marco & Winkelried, Diego, 2004. "Inflation Targeting and Inflation Behavior: A Successful Story?," MPRA Paper 838, University Library of Munich, Germany.
  19. James S. Costain & Michael Reiter, 2004. "Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets," Economics Working Papers 890, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  20. Walsh, Carl E, 1999. "Announcements, Inflation Targeting and Central Bank Incentives," Economica, London School of Economics and Political Science, vol. 66(262), pages 255-69, May.
  21. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
  22. Bernard Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence," IMF Working Papers 06/227, International Monetary Fund.
  23. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency," Computing in Economics and Finance 2006 222, Society for Computational Economics.
  24. Walsh, Carl E., 2005. "Endogenous objectives and the evaluation of targeting rules for monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 889-911, July.
  25. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  26. Jean-François Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies," IMF Working Papers 06/228, International Monetary Fund.
  27. John C. Williams & Andrew T. Levin, 2003. "Parameter Uncertainty and the Central Bank's Objective Function," Computing in Economics and Finance 2003 215, Society for Computational Economics.
  28. Baeriswyl, Romain & Cornand, Camille, 2007. "Monetary policy and its informative value," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-34.
  29. Refet S Gürkaynak & Andrew Levin & Eric Swanson, 2010. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from the U.S., UK, and Sweden," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1208-1242, December.
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