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Targeting Inflation with a Role for Money

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  • Ulf Söderström

Abstract

This paper demonstrates how a target for money growth can be beneficial for an inflation‐targeting central bank acting under discretion. Because the growth rate of money is closely related to the change in the interest rate and the growth of real output, delegating a money growth target to the central bank makes discretionary policy more inertial, leading to better social outcomes. This delegation scheme is also compared with other schemes suggested in the literature. The results indicate that stabilizing money growth around a target can be a sensible strategy for monetary policy, although other delegation schemes are often more efficient.

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  • Ulf Söderström, 2005. "Targeting Inflation with a Role for Money," Economica, London School of Economics and Political Science, vol. 72(288), pages 577-596, November.
  • Handle: RePEc:bla:econom:v:72:y:2005:i:288:p:577-596
    DOI: 10.1111/j.1468-0335.2005.00433.x
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    Cited by:

    1. Carlos Esteban Posada & Camilo Morales J., 2007. "La inflación y la política monetaria colombianas del período 1996-2006: una interpretación," Borradores de Economia 465, Banco de la Republica de Colombia.
    2. Kilponen, Juha & Leitemo, Kai, 2011. "Transmission lags and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 565-578, April.
    3. Kilponen, Juha & Leitemo, Kai, 2007. "Discretion and the transmission lags of monetary policy," Research Discussion Papers 8/2007, Bank of Finland.
    4. Roberto M. Billi & Ulf Söderström & Carl E. Walsh, 2023. "The Role of Money in Monetary Policy at the Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 681-716, June.
    5. Araújo, Eurilton, 2015. "Monetary policy objectives and Money’s role in U.S. business cycles," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 85-107.
    6. Loisel, Olivier, 2008. "Central bank reputation in a forward-looking model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3718-3742, November.
    7. Carlos Esteban Posada & Camilo Morales J., 2007. "La inflación y la política monetaria colombianas del período 1996-2006: una interpretación," Borradores de Economia 4291, Banco de la Republica.
    8. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.
    9. repec:zbw:bofrdp:2007_008 is not listed on IDEAS
    10. Mandler, Martin, 2006. "Are there gains from including monetary aggregates and stock market indices in the monetary policy reaction function? A simulation study of recent U.S. monetary policy," MPRA Paper 2318, University Library of Munich, Germany.
    11. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2013. "Opting Out of the Great Inflation: German Monetary Policy after the Breakdown of Bretton Woods," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 301-346, National Bureau of Economic Research, Inc.
    12. Benchimol, Jonathan & Fourçans, André, 2012. "Money and risk in a DSGE framework: A Bayesian application to the Eurozone," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 95-111.
    13. Mandler, Martin, 2009. "In search of robust monetary policy rules - Should the Fed look at money growth or stock market performance?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 345-361, June.
    14. Guender, Alfred V., 2011. "The timeless perspective vs. discretion: Theory and monetary policy implications for an open economy," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1638-1658.
    15. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    16. Thierry Warin, 2006. "From Full Employment to the Natural Rate of Unemployment: A Survey," Middlebury College Working Paper Series 0601, Middlebury College, Department of Economics.
    17. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank.
    18. Gregory Erin Givens, 2006. "Revisiting the Delegation Problem in a Sticky Price and Wage Economy," Working Papers 200601, Middle Tennessee State University, Department of Economics and Finance.

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