Goals and rules in central bank design
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Goals and rules in central bank design
Goals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank design. central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable. Inflation-targeting regimes provide examples of such goal-based policy frameworks. An alternative approach relics on a rule-based framework in which the policy authorities a Goals and rules in central bank designre judged on whether they set their instrument in a manner consistent with a legislated rille. I consider the performance of goal-based and rule-basedGoals and rules in central bank design
frameworks. 1 first show analytically that both goal-based and rule-based systems balance a trade-off between reducing sources of policy distortions Goals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designmeasures. When the rule is similar to that proposed recently in U.S. H.R. 5108, I find that the optimal weight to assign to the rule-based performance measure is zero. However, when the rule is based on the output efficiency gap, it is generally optimal to make deviations from the rule a part of the Goals and rules in central bank design central bank’s performance measure.JET. Codes: E52, E61.1. IntroductionOn December 20. 1989, the New Zealand parliament gave unanimous approval to thGoals and rules in central bank design
e Reserve Bank of New Zealand Act of 1989 (the Act or the RBNZ Act), thereby formally inaugurating the world's first inflation-targeting regime. The AGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designon 25 Years of Inflation Targeting,” Wellington. New Zealand. December 1 2, 2011. 1 would like to thank conference participants and seminar participants at Norges Rank for their comments and suggestions. Author e-mail: walshctfiucsc.edu.295296 International Journal of Central Banking September 2015 Goals and rules in central bank designgovern mental ministries, a reform designed to boost accountability by establishing clear objectives for government agencies. The assigned objective fGoals and rules in central bank design
or the Reserve Bank was set out in clause 8 of the Act:The primary function of the Bank is to formulate and implement monetary policy directed to the Goals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designor communicating the target to the public through the Policy Target Agreement (PTA) between the government and the central bank, and a mechanism for accountability, the Act and the PTA contained all the key ingredients of inflation targeting.The Act launched a global wave of central bank reforms tha Goals and rules in central bank designt have clarified the policy responsibilities of central banks, increased their independence to implement policies consistent with their responsibilitiGoals and rules in central bank design
es, and provided clear measures of accountability against which their performance could be judged. These reforms have also promoted a greater level ofGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designntability in inflation-targeting regimes is strengthened by the public nature of the announced target and by the requirement that the central bank produce inflation reports or otherwise explain policy actions and their consistency with the announced target. Achieving the target becomes a measure of Goals and rules in central bank designthe central bank's performance.Inflation targeting has now spread to almost thirty countries,1 and many aspects that were pioneered in New Zealand a pGoals and rules in central bank design
ublic commitment Loa target rati? of inflat ion, high levels of t ransparcncy, and accountability are today considered best practice for monetary poliGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank design which has a dual mandat (' for price st ability and maximum sustainable employment now quantify the goal of price stability in terms of an announced, numerical goal for inflation. Tn1 Combining the lists of Roger (2010) with that of Rose (2013) yields twentyeight inflation targoters.Vol. 11 No. SiG Goals and rules in central bank designoals and Rules ill Central Bank Design 297fact, as many as fifty central banks now have quantitative targets or target ranges for inflation.2 So the tGoals and rules in central bank design
wenty-fifth anniversary of the Reserve Bank of New Zealand Act of 1989 marks a landmark event in the history of central banking.Inflation targeting itGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designtransparency, have taken place, and experiences at the zero lower bound and with unconventional policy tools have forced SOUK! central banks to reconsider the way their policy decisions, and the information on which they arc based, arc conveyed Io the public. Even away from the zero lower bound, dev Goals and rules in central bank designelopments in the theory of monetary policy-have emphasized the importance of forward guidance (e.g., Woodford 2005. 2013), and some inflation-targetinGoals and rules in central bank design
g central banks here again, the RBNZ has been in thí' forefront—provide information on the projected future path for the policy interest rate. Others,Goals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank design will trigger future increases in interest rates.While widely’ adopted, inflation targeting has not won universal acceptance. Some critics have argued that inflation targeting has not mattered—that at least during the Great Moderation period, inflation targeters and non-targeters alike enjoyed simil Goals and rules in central bank designar improvements in macroeconomic performance.3 Other critics argue it has mattered too much, blaming a focus on inflation for blinding central banks tGoals and rules in central bank design
o the dangers of a finance crisis, thereby being part of the policy missteps that led to the global financial crisis of 2008-9.Proposals to reform infGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank design replacing inflation as the primary goal with the price level or nominal income. These proposals are consistent with the general approach of inflation targeting in assigning goals to the central bank. They ar(' also consist (Mil with maintaining the central bank's independence Io pursue its objectiv Goals and rules in central bank designes. while the goals provide natural measures of performance that help ensure the central bank remains accountable.2 See hl I p://www.ccnt ralhankncws.Goals and rules in central bank design
info/p/inflat ion-t.argets.html.3An early paper to make this argument was Ball and Sheridan (2001).298 International Journal of Central Banking SeptemGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designntral bank has acted in a manner consistent with its charter—does not need to be based on an ultimate goal of monetary policy such as inflation. A central bank could be assigned and held accountable for achieving targets that are not themselves among the final goals of monetary policy. For example, Goals and rules in central bank designin the 1970s, the U.S. Congress required the Federal Reserve to establish target growth rates for the money supply. Money growth rates are intermediatGoals and rules in central bank design
e targets, neither an ultimate goal of policy nor something directly controlled as an instrument. Another alternative would be to judge the central baGoals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designentatives recently held hearings on a bill that would establish an interest rate rule, with the Federal Reserve required to justify any deviations of the federal funds rate from the rule.4 5 Taylor (2012) illustrates how an instrument rule can be used to assess ex post the Federal Reserve's policy.P Goals and rules in central bank designerformance measures can differ, therefore, in terms of whether they focus on ultimate goals of macroeconomic policy while allowing for instrument indeGoals and rules in central bank design
pendence, as is the case with inflation targeting, or whether they limit the instrument independence of the central bank, as would be the case with a Goals and Rules ill Central Bank Design*Carl E. WalshUniversity of California. Santa CruzBeginning with I he Reserve Bank of New Zealand Act oi' 19S9. Goals and rules in central bank designome targeting frameworks have been extensively analyzed in the literature. However, a similar analysis of regimes that base accountability on adherence to an instrument rule is absent from the literature, a gap the present paper seeks to fdl.4Hearings were held in July 2014. According to a Financial Goals and rules in central bank design Times report on Janet Yellen’s February 25, 2015 testimony before the U.S. House Banking Committee, "The Fed chair swatted down calls from RepublicanGoals and rules in central bank design
s for the institution to be subject to mechanical rate-setting rules, saying she did not want its discretion to be ‘chained’.” Sec “Janet Yellen DefenGọi ngay
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