Efficient Rules for Monetary Policy

Laurence Ball

No 5952, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper defines an efficient rule for monetary policy as one that minimizes a weighted sum of output variance and inflation variance. It derives several results about the efficiency of alternative rules in a simple macroeconomic model. First, efficient rules can be expressed as 'Taylor rules' in which interest rates respond to output and inflation. But the coefficients in efficient Taylor rules differ from the coefficients that fit actual policy in the United States. Second, inflation targets are efficient. Indeed, the set of efficient rules is equivalent to the set of inflation-target policies with different speeds of adjustment. Finally, nominal-income targets are not merely inefficient, but disastrous: they imply that output and inflation have infinite variances.

JEL-codes: E52 (search for similar items in EconPapers)
Date: 1997-03
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (147)

Published as International Finance, Vol. 2, no. 1 (April 1999): 63-83

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Journal Article: Efficient Rules for Monetary Policy (1999)
Working Paper: Efficient rules for monetary policy (1997)
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