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Goals and Rules in Central Bank Design

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  • Carl Walsh

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, recently argued for by John Taylor (2012, 2014), relies on a rule-based framework in which the policy authorities are judged on whether they set their instrument in a manner consist 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 tradeoff 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 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 Walsh, 2015. "Goals and Rules in Central Bank Design," CESifo Working Paper Series 5293, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5293
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5293.pdf
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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. repec:zbw:espost:157540 is not listed on IDEAS
    3. Andrew Foerster & Troy Davig, 2017. "Communicating Monetary Policy Rules," 2017 Meeting Papers 1133, Society for Economic Dynamics.
    4. repec:prg:jnlpep:v:preprint:id:631:p:1-19 is not listed on IDEAS
    5. 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.
    6. repec:prg:jnlpep:v:2017:y:2017:i:5:id:631:p:523-541 is not listed on IDEAS
    7. 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

    Keywords

    central banks; performance measures; Taylor rules;

    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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