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Monetary Policy Strategy: How Did We Get Here?

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  • Frederic S. Mishkin

Abstract

This paper, which is the introductory chapter in my book, "Monetary Policy Strategy", forthcoming from MIT Press, outlines how thinking in academia and central banks about monetary policy strategy has evolved over time. It shows that six ideas that are now accepted by monetary authorities and governments in almost all countries of the world have led to improved monetary performance: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is subject to the time-inconsistency problem; 5) central bank independence helps improve the efficacy of monetary policy; and 6) a strong nominal anchor is the key to producing good monetary policy outcomes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12515.

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Date of creation: Sep 2006
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Publication status: published as Frederic S. Mishkin, 2006. "Monetary Policy Strategy: How Did We Get Here?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 53(4), pages 359-388, December.
Handle: RePEc:nbr:nberwo:12515

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  1. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  2. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  3. Lars E.O Svensson, 2002. "Monetary policy and real stabilization," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 261-312.
  4. Stephen G. Cecchetti & Anil K Kashyap, 1995. "International Cycles," NBER Working Papers 5310, National Bureau of Economic Research, Inc.
  5. Laurence Ball & Niamh Sheridan, 2004. "Does inflation targeting matter?," DNB Staff Reports (discontinued), Netherlands Central Bank 118, Netherlands Central Bank.
  6. M. H. Khalil Timamy, 2005. "Debate," Review of African Political Economy, Taylor & Francis Journals, vol. 32(104-105), pages 383-393, June.
  7. Joshua Aizenman & Reuven Glick, 2008. "Pegged Exchange Rate Regimes-A Trap?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(4), pages 817-835, 06.
  8. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
  9. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, Elsevier, vol. 41(6), pages 1111-1146, June.
  10. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers, Federal Reserve Bank of Boston 98-5, Federal Reserve Bank of Boston.
  11. von Hagen, Jurgen, 1999. "Money growth targeting by the Bundesbank," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 681-701, June.
  12. Lars E. O. Svensson & Michael Woodford, 2003. "Optimal Policy with Partial Information in a Forward-Looking Model: Certainty-Equivalence Redux," NBER Working Papers 9430, National Bureau of Economic Research, Inc.
  13. David Johnson, 2003. "The Effect of Inflation Targets on the Level of Expected Inflation in Five Countries," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1076-1081, November.
  14. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers, Stanford University, Department of Economics 03001, Stanford University, Department of Economics.
  15. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  16. James H. Stock & Mark W. Watson, 1987. "Interpreting Evidence on Money-Income Causality," NBER Working Papers 2228, National Bureau of Economic Research, Inc.
  17. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  18. Markus Hyvonen, 2004. "Inflation Convergence Across Countries," RBA Research Discussion Papers, Reserve Bank of Australia rdp2004-04, Reserve Bank of Australia.
  19. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(8), pages 1521-1538, November.
  20. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(2), pages 151-62, May.
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Citations

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Cited by:
  1. Céline Antonin & Christophe Blot & Paul Hubert & Fabien Labondance & Catherine Mathieu & Christine Rifflart & Vincent Touze, 2013. "Politiques monétaires : est-ce le début de la fin ?," Sciences Po publications info:hdl:2441/6ggbvnr6mun, Sciences Po.
  2. Pierre L. Siklos & Diana N. Weymark, 2009. "Has Inflation Targeting Improved Monetary Policy? Evaluating Policy Effectiveness in Australia, Canada, and New Zealand," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0906, Vanderbilt University Department of Economics.
  3. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "Utilizarea cursurilor valutare drept ancore nominale antiinflaţioniste
    [The use of exchange rates as nominal anchors]
    ," MPRA Paper 52415, University Library of Munich, Germany.
  4. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Kiel Working Papers 1350, Kiel Institute for the World Economy.
  5. Marc-André Gosselin, 2007. "Central Bank Performance under Inflation Targeting," Working Papers, Bank of Canada 07-18, Bank of Canada.
  6. Samarina, Anna, 2012. "Monetary targeting and financial system characteristics: An empirical analysis," Research Report 12011-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  7. Dumitriu, Ramona & Stefanescu, Răzvan, 2013. "Decizii strategice ale politicii monetare
    [Strategic decisions of the Monetary Policy]
    ," MPRA Paper 51242, University Library of Munich, Germany, revised 05 Nov 2013.
  8. Alfred Janc & Michal Jurek & Pawel Marszalek, 2013. "Studies in Financial Systems No 7 Financial System in Poland," FESSUD studies, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project fstudy07, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  9. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2006. "Monetary Policy Under Inflation Targeting: An Introduction," Working Papers Central Bank of Chile, Central Bank of Chile 396, Central Bank of Chile.
  10. repec:spo:wpecon:info:hdl:2441/6ggbvnr6munghes9ob627a1r2 is not listed on IDEAS
  11. Luiz de Mello & Diego Moccero, 2007. "Monetary Policy and Macroeconomic Stability in Latin America: The Cases of Brazil, Chile, Colombia and Mexico," OECD Economics Department Working Papers 545, OECD Publishing.
  12. repec:spo:wpecon:info:hdl:2441/6ggbvnr6munghes9oasij6sc6 is not listed on IDEAS
  13. Pang, Ke, 2013. "Financial integration, nominal rigidity, and monetary policy," International Review of Economics & Finance, Elsevier, Elsevier, vol. 25(C), pages 75-90.
  14. Xavier Timbeau, 2013. "La crise sur un plateau : perspectives 2013-2014," Sciences Po publications info:hdl:2441/6ggbvnr6mun, Sciences Po.
  15. Luigi, Cannari & Giovanni, D'Alessio & Grazia, Marchese, 2008. "Italian Household Wealth: Background, Main Results, Outlook," MPRA Paper 15106, University Library of Munich, Germany.
  16. Eduardo Levy-Yeyati, 2011. "Exchange Rate Regimes," Business School Working Papers, Universidad Torcuato Di Tella 2011-02, Universidad Torcuato Di Tella.
  17. Vlastimir Vukovic & Aleksandar Zdravkovic, 2011. "The Inflation and Exchange Rate in the Five Balkan Countries from Maastricht Convergence Criteria Prospect," Book Chapters, Institute of Economic Sciences.

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