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Monetary Policy Strategies

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  • Robert P. Flood
  • Peter Isard

Abstract

The paper considers the merits of rules and discretion for monetary policy when the structure of the macroeconomic model and the probability distributions of disturbances are not well defined. It is argued that when it is costly to delay policy reactions to seldom-experienced shocks until formal algorithmic learning has been accomplished, and when time consistency problems are significant, a mixed strategy that combines a simple verifiable rule with discretion is attractive. The paper also discusses mechanisms for mitigating credibility problems and emphasizes that arguments against various types of simple rules lost their force under a mixed strategy.

Suggested Citation

  • Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2770
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    References listed on IDEAS

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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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    Cited by:

    1. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    2. Joseph G. Haubrich & Joseph A. Ritter, 1996. "Dynamic commitment and imperfect policy rules," Working Paper 9601, Federal Reserve Bank of Cleveland.
    3. Garfinkel, Michelle R. & Oh, Seonghwan, 1995. "When and how much to talk credibility and flexibility in monetary policy with private information," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 341-357, April.
    4. Joseph A. Ritter & Joseph G. Haubrich, 1996. "Commitment as investment under uncertainty," Working Paper 9606, Federal Reserve Bank of Cleveland.
    5. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
    6. Sebastian Edwards, 1995. "Trade Policy, Exchange Rates, and Growth," NBER Chapters,in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 13-52 National Bureau of Economic Research, Inc.
    7. Sebastian Edwards, 1993. "Exchange Rates, Inflation and Disinflation: Latin American Experiences," NBER Working Papers 4320, National Bureau of Economic Research, Inc.
    8. Masson, Paul R. & Shukayev, Malik D., 2011. "Are bygones not bygones? Modeling price-level targeting with an escape clause and lessons from the gold standard," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 162-175, June.
    9. Jagjit S. Chadha & Lucio Sarno & Giorgio Valente, 2004. "Monetary Policy Rules, Asset Prices, and Exchange Rates," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 529-552, November.
    10. Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March.
    11. Bordo, Michael D. & Jonung, Lars, 1994. "Monetary Regimes, Inflation and Monetary Reform: An Essay in Honor of Axel Leijonhufvud," SSE/EFI Working Paper Series in Economics and Finance 16, Stockholm School of Economics.
    12. Sebastian Edwards & Fernando J. Losada, 1994. "Fixed Exchange Rates, Inflation and Macroeconomic Discipline," NBER Working Papers 4661, National Bureau of Economic Research, Inc.
    13. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-211, May.
    14. Westelius Niklas J, 2009. "Inflation Range Targets with Hard Edges," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-28, April.
    15. Joseph G. Haubrich & Joseph A. Ritter, 1992. "Commitment as irreversible investment," Working Paper 9217, Federal Reserve Bank of Cleveland.
    16. Sebastian Edwards, 1997. "The Mexican Peso Crisis? How Much Did We Know? When Did We Know It?," NBER Working Papers 6334, National Bureau of Economic Research, Inc.
    17. Richard Dennis, 1997. "Bandwidth, bandlength, and inflation targeting: some observations," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 60, March.
    18. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
    19. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
    20. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
    21. Michelle R. Garfinkel & Seonghwan Oh, 1990. "Strategic Discipline in Monetary Policy With Private Information: Optimal Targeting Periods," UCLA Economics Working Papers 584, UCLA Department of Economics.
    22. Paolo Manasse, 2007. "Deficit Limits and Fiscal Rules for Dummies," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 455-473, July.
    23. Haubrich, Joseph G. & Ritter, Joseph A., 2004. "Committing and reneging: A dynamic model of policy regimes," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 1-18.
    24. Zhaohui Chen & Alberto Giovannini, 1993. "The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities," NBER Working Papers 4291, National Bureau of Economic Research, Inc.

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