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Model Uncertainty and Delegation: A Case for Friedman's "k"-Percent Money Growth Rule?




Model uncertainty affects the monetary policy delegation problem. If there is uncertainty with regards to the determination of the delegated objective variables, the central bank will want robustness against potential model misspecifications. We show that with plausible degree of model uncertainty, delegation of the Friedman rule of increasing the money stock by "k" percent to the central bank will outperform commitment to the social loss function (flexible inflation targeting). The reason is that the price paid for robustness under flexible inflation targeting outweighs the inefficiency of money growth targeting. Imperfect control of money growth does not change this conclusion. Copyright (c)2008 The Ohio State University.

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  • Juha Kilponen & Kai Leitemo, 2008. "Model Uncertainty and Delegation: A Case for Friedman's "k"-Percent Money Growth Rule?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 547-556, March.
  • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:547-556

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    References listed on IDEAS

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    Cited by:

    1. Tillmann, Peter, 2012. "Cross-checking optimal monetary policy with information from the Taylor rule," Economics Letters, Elsevier, vol. 117(1), pages 204-207.
    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. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2008. "Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods," NBER Working Papers 14596, National Bureau of Economic Research, Inc.
    4. Gerke, Rafael & Hammermann, Felix & Lewis, Vivien, 2012. "Robust monetary policy in a model with financial distress," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 318-325.
    5. Luca Sessa, 2012. "Economic (in)stability under monetary targeting," Temi di discussione (Economic working papers) 858, Bank of Italy, Economic Research and International Relations Area.
    6. José De Gregorio, 2008. "Price Stability and Financial Stability: Some Thoughts on the Current Global Financial Crisis," Economic Policy Papers Central Bank of Chile 28, Central Bank of Chile.

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