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Cross-Checking Optimal Monetary Policy with Information from the Taylor Rule

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  • Peter Tillmann

    () (University of Giessen)

Abstract

This paper shows that monetary policy should be delegated to a central bank that cross-checks optimal policy with information from the Taylor rule. Attaching some weight to deviations of the interest rate from the interest rate prescribed by the Taylor rule is beneficial if the central bank aims at optimally stabilizing inflation and output gap variability under discretion. Placing a weight on deviations from a simple Taylor rule increases the overall relative weight of inflation volatility in the effective loss function, which reduces the stabilization bias of discretionary monetary policy. The welfare-enhancing role of this modified loss function depends on the size of the stabilization bias, i.e. on the degree of persistence in the cost-push shock process, and the relevance of demand shocks. These results can be interpreted in terms of the optimal composition of monetary policy committees.

Suggested Citation

  • Peter Tillmann, 2011. "Cross-Checking Optimal Monetary Policy with Information from the Taylor Rule," MAGKS Papers on Economics 201132, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201132
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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/32-2011_tillmann.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Carl E. Walshn, 2016. "Goals versus Rules as Central Bank Preformance Measures," Book Chapters, Hoover Institution, Stanford University.
    2. Carl Walsh, 2015. "Goals and Rules in Central Bank Design," CESifo Working Paper Series 5293, CESifo Group Munich.
    3. 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.
    4. Pelin Ilbas & Øistein Røisland & Tommy Sveen, 2012. "Robustifying optimal monetary policy using simple rules as cross-checks," Working Paper 2012/22, Norges Bank.
    5. Bursian Dirk & Roth Markus, 2014. "Optimal policy and Taylor rule cross-checking under parameter uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-24, January.

    More about this item

    Keywords

    optimal monetary policy; stabilization bias; monetary policy delegation; robustness; Taylor rule; monetary policy committee;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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