Optimal simple objectives for monetary policy when banks matter

Lien Laureys, Roland Meeks and Boromeus Wanengkirtyo

European Economic Review, 2021, vol. 135, issue C

Abstract: We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilising inflation, a measure of resource utilisation, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.

Keywords: Monetary policy; Simple loss function; Banks; Medium-scale DSGE models; Euro area economy (search for similar items in EconPapers)
JEL-codes: E17 E52 E58 G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Working Paper: Optimal simple objectives for monetary policy when banks matter (2020)
Working Paper: Optimal Simple Objectives for Monetary Policy When Banks Matter (2020)
Working Paper: Optimal Simple Objectives for Monetary Policy when Banks Matter (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:135:y:2021:i:c:s0014292121000726

DOI: 10.1016/j.euroecorev.2021.103719

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