Showing papers by "Carl E. Walsh published in 2015"

Goals and Rules in Central Bank Design

Abstract: © 2015, European Central Bank All rights reserved Beginning with the Reserve Bank of New Zealand Act of 1989, central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable Inflation-targeting regimes provide examples of such goal-based policy frameworks An alternative approach relies on a rule-based framework in which the policy authorities are judged on whether they set their instrument in a manner consistent with a legislated rule I consider the performance of goal-based and rule-based frameworks I first show analytically that both goal-based and rule-based systems balance a trade-off between reducing sources of policy distortions and preserving policy flexibility Then, using an estimated DSGE model, I find the optimal weights to place on goal-based and rule-based performance measures When the rule is similar to that proposed recently in US HR 5108, I find that the optimal weight to assign to the rule-based performance measure is zero However, when the rule is based on the output efficiency gap, it is generally optimal to make deviations from the rule a part of the central bank’s performance measure

Goals and Rules in Central Bank Design

Abstract: Beginning with the Reserve Bank of New Zealand Act of 1989, central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable. Inflation targeting regimes provide examples of such goal-based policy frameworks. An alternative approach, recently argued for by John Taylor (2012, 2014), relies on a rule-based framework in which the policy authorities are judged on whether they set their instrument in a manner consist with a legislated rule. I consider the performance of goal-based and rule-based frameworks. I first show analytically that both goal-based and rule-based systems balance a tradeoff between reducing sources of policy distortions and preserving policy flexibility. Then, using an estimated DSGE model, I find the optimal weights to place on goal-based and rule-based performance measures. When the rule is similar to that proposed recently in U.S. H.R. 5108, I find the optimal weight to assign to the rule-based performance measure is zero. However, when the rule is based on the output efficiency gap, it is generally optimal to make deviations from the rule a part of the central bank’s performance measure.