IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_5097.html
   My bibliography  Save this paper

Multiple Objectives and Central Bank Tradeoffs under Flexible Inflation Targeting

Author

Listed:
  • Carl Walsh

Abstract

Many inflation targeting central banks are facing calls to expand their list of policy goals. I discuss how recent research provides new insights into the goals of policy and the tradeoffs presented by multiple goals. I focus particular attention on the role of unemployment and labor market frictions, but I also discuss the role of currency misalignment in affecting policy objectives in open economies. Current models often find that price stability is close to the optimal policy, even when, in theory, the central bank should care about multiple goals. I offer some ideas about why this might be the case.

Suggested Citation

  • Carl Walsh, 2014. "Multiple Objectives and Central Bank Tradeoffs under Flexible Inflation Targeting," CESifo Working Paper Series 5097, CESifo.
  • Handle: RePEc:ces:ceswps:_5097
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5097.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-162, April.
    2. Luca Sala & Ulf Söderström & Antonella Trigari, 2013. "Structural and Cyclical Forces in the Labor Market during the Great Recession: Cross-Country Evidence," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 345-404.
    3. Cambell Leith & Simon Wren-Lewis, 2006. "The Optimal Monetary Policy Response to Exchange Rate Misalignments," CDMA Conference Paper Series 0605, Centre for Dynamic Macroeconomic Analysis.
    4. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    5. Federico Ravenna & Carl E. Walsh, 2012. "Screening and Labor Market Flows in a Model with Heterogeneous Workers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s2), pages 31-71, December.
    6. Faia, Ester & Lechthaler, Wolfgang & Merkl, Christian, 2009. "Labor Turnover Costs, Workers' Heterogeneity, and Optimal Monetary Policy," IZA Discussion Papers 4322, Institute of Labor Economics (IZA).
    7. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, vol. 116(512), pages 208-231, June.
    8. Sala, Luca & Söderström, Ulf & Trigari, Antonella, 2008. "Monetary policy under uncertainty in an estimated model with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 983-1006, July.
    9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
    10. Altug,Sumru & Chadha,Jagjit S. & Nolan,Charles (ed.), 2003. "Dynamic Macroeconomic Analysis," Cambridge Books, Cambridge University Press, number 9780521826686, October.
    11. Ester Faia & Tommaso Monacelli, 2008. "Optimal Monetary Policy in a Small Open Economy with Home Bias," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 721-750, June.
    12. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, vol. 101(6), pages 2796-2822, October.
    13. Klaus Schmidt-Hebbel., 2009. "Inflation Targeting Twenty Years on: Where, When, Why, With what Effects, What lies ahead?," Documentos de Trabajo 360, Instituto de Economia. Pontificia Universidad Católica de Chile..
    14. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
    15. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
    16. Rose, Andrew K., 2014. "Surprising similarities: Recent monetary regimes of small economies," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 5-27.
    17. Carl E. Walsh, 2005. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 829-849, October.
    18. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
    19. Altug,Sumru & Chadha,Jagjit S. & Nolan,Charles (ed.), 2003. "Dynamic Macroeconomic Analysis," Cambridge Books, Cambridge University Press, number 9780521534031, October.
    20. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2015. "Understanding the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 110-167, January.
    21. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, February.
    22. Jan F. Qvigstad, 2006. "When does an interest rate path “look good”? Criteria for an appropriate future interest rate path," Working Paper 2006/05, Norges Bank.
    23. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    24. Robert E. Hall, 2017. "High Discounts and High Unemployment," American Economic Review, American Economic Association, vol. 107(2), pages 305-330, February.
    25. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    26. Ravenna, Federico & Walsh, Carl E., 2012. "Monetary policy and labor market frictions: A tax interpretation," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 180-195.
    27. James B. Bullard, 2013. "Some unpleasant implications for unemployment targeters," Speech 215, Federal Reserve Bank of St. Louis.
    28. Brito, Ricardo D. & Bystedt, Brianne, 2010. "Inflation targeting in emerging economies: Panel evidence," Journal of Development Economics, Elsevier, vol. 91(2), pages 198-210, March.
    29. repec:fip:fedlps:y:2013:i:apr17 is not listed on IDEAS
    30. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hauser, Daniela & Seneca, Martin, 2022. "Labor mobility in a monetary union," Journal of International Economics, Elsevier, vol. 137(C).
    2. Martin Seneca, 2020. "Risk Shocks and Monetary Policy in the New Normal," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 185-232, December.
    3. Antoine Lepetit, 2020. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-Offs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 29-45, April.
    4. Krug, Sebastian, 2018. "The interaction between monetary and macroprudential policy: Should central banks 'lean against the wind' to foster macro-financial stability?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-69.
    5. Krug, Sebastian, 2015. "The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macrofinancial stability?," Economics Working Papers 2015-08, Christian-Albrechts-University of Kiel, Department of Economics.
    6. Faisal Rachman, 2016. "Is Inflation Target Announced by Bank Indonesia the Most Accurate Inflation Forecast?," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 62, pages 98-120, August.
    7. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    8. Carlos Caceres & Mr. Yan Carriere-Swallow & Bertrand Gruss, 2016. "Global Financial Conditions and Monetary Policy Autonomy," IMF Working Papers 2016/108, International Monetary Fund.
    9. Jan Fredrik Qvigstad, 2019. "How to draft ‘good’ minutes of monetary policy decisions," Economic Affairs, Wiley Blackwell, vol. 39(1), pages 44-64, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-162, April.
    2. Raissi, Mehdi, 2015. "Flexible inflation targeting and labor market inefficiencies," Economic Modelling, Elsevier, vol. 46(C), pages 283-300.
    3. Proaño, Christian R., 2012. "Gradual wage-price adjustments, labor market frictions and monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 220-235.
    4. Federico Ravenna & Carl E. Walsh, 2022. "Worker Heterogeneity, Selection, and Unemployment Dynamics in a Pandemic," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(S1), pages 113-155, February.
    5. Ravenna, Federico & Walsh, Carl E., 2008. "Vacancies, unemployment, and the Phillips curve," European Economic Review, Elsevier, vol. 52(8), pages 1494-1521, November.
    6. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
    7. Sergio A. Lago Alves, 2018. "Monetary Policy, Trend Inflation, and Unemployment Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 637-673, June.
    8. Raissi, M., 2011. "A Linear Quadratic Approach to Optimal Monetary Policy with Unemployment and Sticky Prices: The Case of a Distorted Steady State," Cambridge Working Papers in Economics 1146, Faculty of Economics, University of Cambridge.
    9. Giuseppe CICCARONE & Francesco GIULI & Danilo LIBERATI, 2010. "Gross and net loan flows under search and matching frictions in labour and credit markets," EcoMod2010 259600040, EcoMod.
    10. Tang, Jenn-Hong, 2010. "Optimal monetary policy in a new Keynesian model with job search," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 330-353, March.
    11. Mattesini, Fabrizio & Rossi, Lorenza, 2009. "Optimal monetary policy in economies with dual labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1469-1489, July.
    12. Francesco Furlanetto & Nicolas Groshenny, 2016. "Mismatch Shocks and Unemployment During the Great Recession," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1197-1214, November.
    13. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    14. Federico Ravenna & Carl E. Walsh, 2012. "Screening and Labor Market Flows in a Model with Heterogeneous Workers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 31-71, December.
    15. Ravenna, Federico & Walsh, Carl E., 2012. "Monetary policy and labor market frictions: A tax interpretation," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 180-195.
    16. Rhee, Hyuk Jae & Song, Jeongseok, 2018. "Labor market friction, nominal wage rigidities, and monetary policy in a small open economy," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 140-158.
    17. Rossi, Lorenza & Mattesini, Fabrizio, 2007. "Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School," MPRA Paper 8414, University Library of Munich, Germany, revised 2008.
    18. Federico Ravenna & Carl E. Walsh, 2009. "The welfare consequences of monetary policy," Working Paper Series 2009-12, Federal Reserve Bank of San Francisco.
    19. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    20. Carl E. Walsh & Federico Ravenna, 2010. "Business Cycles and Labor Market Flows with Sequential Screening," 2010 Meeting Papers 571, Society for Economic Dynamics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_5097. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.