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Efficient Rules for Monetary Policy


  • Laurence Ball


This paper defines an efficient rule for monetary policy as one that minimizes a weighted sum of output variance and inflation variance. It derives several results about the efficiency of alternative rules in a simple macroeconomic model. First, efficient rules can be expressed as 'Taylor rules' in which interest rates respond to output and inflation. But the coefficients in efficient Taylor rules differ from the coefficients that fit actual policy in the United States. Second, inflation targets are efficient. Indeed, the set of efficient rules is equivalent to the set of inflation-target policies with different speeds of adjustment. Finally, nominal-income targets are not merely inefficient, but disastrous: they imply that output and inflation have infinite variances.

Suggested Citation

  • Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5952
    Note: EFG ME

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    References listed on IDEAS

    1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters,in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
    4. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
    5. Eric Hansen, 1996. "Price level versus inflation rate targets in an open economy with overlapping wage contracts," Pacific Basin Working Paper Series 96-01, Federal Reserve Bank of San Francisco.
    6. repec:fth:harver:1418 is not listed on IDEAS
    7. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    8. Matheny, K-J, 1996. "Output Targeting and an Argument for Stabilization Policies," Purdue University Economics Working Papers 1092, Purdue University, Department of Economics.
    9. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
    10. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-819, December.
    11. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 1-45, December.
    12. West, Kenneth D, 1986. "Targeting Nominal Income: A Note," Economic Journal, Royal Economic Society, vol. 96(384), pages 1077-1083, December.
    13. Glenn D. Rudebusch, 1995. "What are the lags in monetary policy?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb3.
    14. Frankel, Jeffrey, 1995. "The Stabilizing Properties of a Nominal GNP Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 318-334, May.
    15. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters,in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
    16. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
    17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    18. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, January.
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy


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