Is Optimal Monetary Policy Always Optimal?

Troy Davig and Refet Gürkaynak

International Journal of Central Banking, 2015, vol. 11, issue 4, 353-382

Abstract: In a world with multiple inefficiencies, the single policy tool the central bank has control over will not undo all inefficiencies; this is well established. We argue that the world is better characterized by multiple inefficiencies and multiple policymakers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the trade-offs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a sub-optimal set. We highlight this issue and call for a broader thinking of optimal policies.

JEL-codes: E02 E52 E58 E61 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Is Optimal Monetary Policy Always Optimal? (2015)
Working Paper: Is Optimal Monetary Policy Always Optimal? (2015)
Working Paper: Is optimal monetary policy always optimal? (2015)
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