Designing Central Bank Loss Functions
Stephen Miller () and
Huiping Yuan ()
No 908, Working Papers from University of Nevada, Las Vegas , Department of Economics
Kydland and Prescott (1977) consider the issue of the time-inconsistency of optimal policy and its source. Our paper provides additional insight on this issue. They develop a simple model of monetary policy making, where the central bank needs some commitment technique to achieve optimal monetary policy over time. Although not their main focus, they illustrate the difference between consistent and optimal policy in a sequential-decision one-period world. In our solution, the government appoints a central bank or delegates to the central bank an objective function that differs from the social welfare function. The central bank’s welfare function causes the consistent policy implemented by the central bank to prove optimal for society. The optimal institutional design for the Kydland-Prescott sequential-decision one-period model requires the appointment or delegation to a completely conservative central banker.
Keywords: Consistent policy; Optimal policy; Consistent targets (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Forthcoming International Journal of Business and Economics
Downloads: (external link)
http://web.unlv.edu/projects/RePEc/pdf/0908.pdf First version, 2008 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to web.unlv.edu:80
Journal Article: Designing Central Bank Loss Functions (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nlv:wpaper:0908
Access Statistics for this paper
More papers in Working Papers from University of Nevada, Las Vegas , Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bill Robinson ().