Central Bank Objectives, Monetary Policy Rules, and Limited Information

Jonathan Benchimol

No 2024.04, Bank of Israel Working Papers from Bank of Israel

Abstract: Since the Global Financial Crisis, a lively debate has emerged regarding the monetary policy rule the central bank of a small open economy (SOE) follows and should follow. By identifying the monetary policy rule that best fits historical data and minimizes central bank loss functions, this study contributes to this debate. We estimate a medium-scale micro-founded SOE model under various monetary policy rules using Israeli data from 1994 to 2019. Our results indicate that the model achieves a better fit to historical data when assuming inflation targeting (IT) compared to nominal income targeting (NGDP). Given central bank goals, shock uncertainty, and limited information, NGDP targeting rules may have been more desirable over the last three decades than IT rules.

Keywords: Monetary policy rule; Central bank loss; Inflation targeting; NGDP targeting; Limited information (search for similar items in EconPapers)
JEL-codes: C11 C54 E32 E52 E58 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his and nep-mon
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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2024.04.pdf First Version, 2024 (application/pdf)

Related works:
Journal Article: Central bank objectives, monetary policy rules, and limited information (2024)
Working Paper: Central bank objectives, monetary policy rules, and limited information (2024)
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