The Impact of Central Bank Independence and Preferences on Inflation Targeting in Rule-Based and Discretionary Monetary Policy Approaches

Davoud Mahmoudinia () and Fatemeh Abdollahinasab ()
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Davoud Mahmoudinia: Associate professor, Department of Economics at Vali-e-Asr University of Rafsanjan
Fatemeh Abdollahinasab: M.A in Economics, Department of Economics at Vali-e-Asr University of Rafsanjan

Quarterly Journal of Applied Theories of Economics, 2023, vol. 10, issue 4, 235-276

Abstract: This study investigates the impact of central bank autonomy and preferences on inflation targeting within rule-based and discretionary monetary policy frameworks. Due to rational expectations, discretionary policies often lead to time inconsistency and inflationary biases. Increasing central bank independence and aligning preferences with inflation control are proposed as solutions to mitigate these biases. This study analyzes central bank preferences in rule-based and discretionary policies using a general equilibrium approach and conducts simulations. Results indicate that inflation rates are lower under rule-based policies and that increasing the central bank's conservatism and preferences reduces inflation. Additionally, econometric models show a negative relationship between central bank independence and inflation in both developed and developing countries

Keywords: Central bank preferences; rule-based policy; discretionary policy; time inconsistency; inflation bias (search for similar items in EconPapers)
JEL-codes: C22 F17 F31 F41 (search for similar items in EconPapers)
Date: 2023
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