Simple mandates, monetary rules, and trend-inflation

Szabolcs Deák, Paul Levine () and Son T. Pham

Macroeconomic Dynamics, 2024, vol. 28, issue 4, 757-790

Abstract: A mandate framework is proposed for delegating monetary policy to an instrument-independent, but goal-dependent central bank that emphasizes simplicity in both the objectives entering the welfare criterion and those in the instrument rule. It consists of: (i) a simple quadratic loss function penalizing deviations from target variables; (ii) a welfare-optimized, Taylor-type log-linear nominal interest-rate rule with targets that match those in the loss function; (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate imposing a low unconditional probability of ZLB episodes; and (iv) a long-run inflation target. In an estimated New Keynesian model with these features, we find that for a quarterly probability of 5%, an optimal annual inflation target is close to 2%, weights for real variables in the loss function are small compared with inflation except for the real wage growth mandate and the optimized rules mimic a price-level rule.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:28:y:2024:i:4:p:757-790_1

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