Is optimal monetary policy always optimal?

Troy Davig and Refet Gürkaynak

No RWP 15-5, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple ine?ciencies and multiple policy makers 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 tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled ?exible in?ation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.

Keywords: Monetary policy (search for similar items in EconPapers)
JEL-codes: E02 E52 E58 E61 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-07-30
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: 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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