Working Paper: CEPR ID: DP2522
Authors: Glenn Rudebusch; Lars E. O. Svensson
Abstract: Using a small empirical model of inflation, output, and money estimated on US data, we compare the relative performance of monetary targeting and inflation targeting. The results show that monetary targeting would be quite inefficient, with both higher inflation and output variability. This is true even with a nonstochastic money demand formulation. Our results are also robust to using a P* model of inflation. Therefore, in these popular frameworks, there is no support for the prominent role given to money growth in the Eurosystem's monetary policy strategy.
Keywords: ECB; Inflation targeting; Monetary targeting
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary targeting (E52) | Higher variability in inflation (E31) |
| Monetary targeting (E52) | Higher variability in output (D29) |
| Monetary targeting (E52) | Poor predictor of future inflation (E31) |
| Monetary targeting (E52) | Price stability (E31) |