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Efficient Rules for Monetary Policy

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  • Laurence Ball

Abstract

This paper defines an efficient rule for monetary policy as one that minimizes a weighted sum of output variance and inflation variance. It derives several results about the efficiency of alternative rules in a simple macroeconomic model. First, efficient rules can be expressed as ‘Taylor rules’ in which interest rates respond to output and inflation. But the coefficients in efficient Taylor rules differ from the coefficients that fit actual policy in the United States. Second, inflation targets are efficient. Indeed, the set of efficient rules is equivalent to the set of inflation‐target policies with different speeds of adjustment. Finally, nominal‐income targets are highly inefficient: they create great volatility in both inflation and output.

Suggested Citation

  • Laurence Ball, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
  • Handle: RePEc:bla:intfin:v:2:y:1999:i:1:p:63-83
    DOI: 10.1111/1468-2362.00019
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    References listed on IDEAS

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    1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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