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Price stability and monetary policy: A proposal of a non active policy rule

Author

Listed:
  • Juan E. Castañeda

    (Departamento de Economía Aplicada y Gestión Pública, UNED, Madrid, Spain)

  • Geoffrey E. Wood

    (Faculty of Finance, Cass Business School, London, United Kingdom)

Abstract

A new type of monetary policy rule designed to achieve both price and output stability has increasingly been recommended during the last business cycle expansion, prior to the 2007 crisis. This type of rule implies "active" reaction functions. Based on the new Keynesian approach to monetary economics, these rules prescribe an active response by the central bank in the face of any shock that shifts prices or output from target, which leads to excessive money creation. Here, a less active type of reaction function is proposed; one in which price stability is the long run target, but permitting prices to respond to changes originating in real disturbances. It is argued that the resulting policy delivers outcomes preferable to currently popular rules.

Suggested Citation

  • Juan E. Castañeda & Geoffrey E. Wood, 2011. "Price stability and monetary policy: A proposal of a non active policy rule," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 34(95), pages 62-72, Agosto.
  • Handle: RePEc:cud:journl:v:34:y:2011:i:95:p:62-72
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    Cited by:

    1. Cendejas Bueno, José Luis & Muñoz, Félix & Castañeda, Juan, 2013. "Expansión monetaria y ciclo económico en España: 1998-2012," Working Papers in Economic Theory 2013/09, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    2. José Luis Cendejas Bueno & Félix-Fernando Muñoz & Juan Castañeda, 2014. "When Money Matters," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 15(2), pages 77-110, April.

    More about this item

    Keywords

    Reaction function; Neutral monetary policy; Monetary rule; Taylor rule;

    JEL classification:

    • 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

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