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Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation

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  • Benchimol, Jonathan

    () (Bank of Israel)

  • Fourçans, André

    () (ESSEC Business School)

Abstract

Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank’s objectives? Is minimizing a central bank loss equivalent to maximizing households’ welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same.

Suggested Citation

  • Benchimol, Jonathan & Fourçans, André, 2017. "Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation," Globalization Institute Working Papers 329, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:329
    DOI: 10.24149/gwp329
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    References listed on IDEAS

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    Cited by:

    1. Benchimol, Jonathan & Bounader, Lahcen, 2018. "Optimal monetary policy under bounded rationality," Research Discussion Papers 9/2018, Bank of Finland.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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