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Optimal Simple Objectives for Monetary Policy when Banks Matter
Author:
Lien Laureys
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Mr. Roland Meeks
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https://orcid.org/0000-0002-1321-3182
, and
Boromeus Wanengkirtyo
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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 244
Language:
English
Publication Date:
13 Nov 2020
DOI:
https://doi.org/10.5089/9781513561172.001
ISBN:
9781513561172
ISSN:
1018-5941
Pages:
59
Keywords:
Monetary policy; Simple loss function; Banks; Medium-scale DSGE models; Euro area economy.; WP; output gap stabilization; output gap volatility; output gap-inflation trade-off; inflation-output gap trade-off; stabilization objective; Euro area economy; Output gap; Inflation; Financial frictions; Inflation targeting; Production growth
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund