Efficient rules for monetary policy
Laurence Ball ()
No G97/3, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand
This paper defines an efficient rule for monetary policy as one that minimises 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 E32 E30 (search for similar items in EconPapers)
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Journal Article: Efficient Rules for Monetary Policy (1999)
Working Paper: Efficient Rules for Monetary Policy (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:1997/03
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