Robustness in monetary policymaking : a case for the Friedman rule
Kilponen, Juha; Leitemo, Kai (01.02.2006)
Numero
4/2006Julkaisija
Bank of Finland
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201501291023Tiivistelmä
Inflation targeting involves using all available information in
stabilizing inflation around some target rate (Svensson, 2003).
Inflation is typically at the very end of the transmission
mechanism and hence its determination is subject to much model
uncertainty which the central bank will want to guard against using
robust policies. Such robustness comes however with the cost of
increased social loss under the most likely description of the
economy. We show that with a sufficiently high degree of model
uncertainty, adherence to the Friedman rule of increasing the money
stock by k percent will be superior as the price paid for
robustness is smaller.
Key words: policy robustness, money growth targeting, inflation
targeting, Friedman rule
JEL classification numbers: E42, E52, E58, E61
stabilizing inflation around some target rate (Svensson, 2003).
Inflation is typically at the very end of the transmission
mechanism and hence its determination is subject to much model
uncertainty which the central bank will want to guard against using
robust policies. Such robustness comes however with the cost of
increased social loss under the most likely description of the
economy. We show that with a sufficiently high degree of model
uncertainty, adherence to the Friedman rule of increasing the money
stock by k percent will be superior as the price paid for
robustness is smaller.
Key words: policy robustness, money growth targeting, inflation
targeting, Friedman rule
JEL classification numbers: E42, E52, E58, E61