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Mandates and Monetary Rules a New Keynesian Framework

Author

Listed:
  • Szabolcs Deak

    (University of Exeter and CIMS)

  • Paul Levine

    (University of Surrey and CIMS)

  • Son T. Pham

    (University of Surrey)

Abstract

We develop a general mandate framework for delegating monetary policy to an instrument-independent, but goal-dependent central bank. The goal of the mandate consists of: (i) a simple quadratic loss function that penalizes deviations from target macroeconomic variables; (ii) a form of a Taylor-type nominal interest-rate rule that responds to the same target variables; (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate in the form of an unconditional probability of ZLB episodes and (iv) a long-run (steady-state) inflation target. The central bank remains free to choose the strength of its response to the targets specified by the mandate. An estimated standard New Keynesian model is used to compute household-welfare-optimal mandates with these features. We find two main results that are robust across a number of different mandates: first, the optimized rule takes the form of a Taylor simple rule close to a price-level rule. Second, the optimal level of inflation target, conditional on a quarterly frequency of the nominal interest hitting the ZLB of 0.025, is close to the typical target annual inflation of 2% and to achieve a lower probability of 0.01 requires an inflation target of 3.5%.

Suggested Citation

  • Szabolcs Deak & Paul Levine & Son T. Pham, 2020. "Mandates and Monetary Rules a New Keynesian Framework," School of Economics Discussion Papers 0120, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0120
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    File URL: https://repec.som.surrey.ac.uk/2020/DP01-20.pdf
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    JEL classification:

    • 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
    • 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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