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Day Two Keynote Address: Goals and Rules in Central Bank Design

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  • Carl E. Walsh

    (University of California, Santa Cruz)

Abstract

Beginning with the Reserve Bank of New Zealand Act of 1989, central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable. Inflation-targeting regimes provide examples of such goal-based policy frameworks. An alternative approach relies on a rule-based framework in which the policy authorities are judged on whether they set their instrument in a manner consistent with a legislated rule. I consider the performance of goal-based and rule-based frameworks. I first show analytically that both goal-based and rule-based systems balance a trade-off between reducing sources of policy distortions and preserving policy flexibility. Then, using an estimated DSGE model, I find the optimal weights to place on goal-based and rule-based performance measures. When the rule is similar to that proposed recently in U.S. H.R. 5108, I find that the optimal weight to assign to the rule-based performance measure is zero. However, when the rule is based on the output efficiency gap, it is generally optimal to make deviations from the rule a part of the central bank’s performance measure.

Suggested Citation

  • Carl E. Walsh, 2015. "Day Two Keynote Address: Goals and Rules in Central Bank Design," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 295-352, September.
  • Handle: RePEc:ijc:ijcjou:y:2015:q:4:a:10
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    References listed on IDEAS

    as
    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. N. Nergiz Dincer & Barry Eichengreen, 2014. "Central Bank Transparency and Independence: Updates and New Measures," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 189-259, March.
    3. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, November.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. Alexander Frankel, 2014. "Aligned Delegation," American Economic Review, American Economic Association, vol. 104(1), pages 66-83, January.
    6. Tillmann, Peter, 2012. "Cross-checking optimal monetary policy with information from the Taylor rule," Economics Letters, Elsevier, vol. 117(1), pages 204-207.
    7. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2012. "The Macroeconomic Effects of Large‐scale Asset Purchase Programmes," Economic Journal, Royal Economic Society, vol. 122(564), pages 289-315, November.
    8. Pelin Ilbas & Øistein Røisland & Tommy Sveen, 2012. "Robustifying optimal monetary policy using simple rules as cross-checks," Working Paper 2012/22, Norges Bank.
    9. Miguel Casares & Antonio Moreno & Jesús Vázquez, 2012. "Wage stickiness and unemployment fluctuations: an alternative approach," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 3(3), pages 395-422, September.
    10. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
    11. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    12. Milton Friedman & John B. Taylor (ed.), 2017. "Milton Friedman on Freedom," Books, Hoover Institution, Stanford University, number 4.
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    Citations

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    Cited by:

    1. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2018. "Estimating the Taylor Rule in the Time-Frequency Domain," NIPE Working Papers 04/2018, NIPE - Universidade do Minho.
    2. Andrew Foerster & Troy Davig, 2017. "Communicating Monetary Policy Rules," 2017 Meeting Papers 1133, Society for Economic Dynamics.
    3. repec:zbw:espost:157540 is not listed on IDEAS
    4. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2016. "Estimating the Taylor Rule in the Time-Frequency Domain," CEF.UP Working Papers 1404, Universidade do Porto, Faculdade de Economia do Porto.
    5. repec:prg:jnlpep:v:preprint:id:631:p:1-19 is not listed on IDEAS
    6. Fratzscher, Marcel, 2016. "Rules versus Human Beings, and the Mandate of the ECB," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 68-87.
    7. repec:prg:jnlpep:v:2017:y:2017:i:5:id:631:p:523-541 is not listed on IDEAS
    8. Benchimol, Jonathan & Fourçans, André, 2017. "Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation," Globalization and Monetary Policy Institute Working Paper 329, Federal Reserve Bank of Dallas.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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