Working Paper: CEPR ID: DP4083
Authors: Fabrice Collard; Harris Dellas
Abstract: We study the properties of alternative central bank targeting procedures within the standard New Keynesian model. We find that Poole?s famous insights concerning the output stabilization properties of money and interest-rate targeting obtain when intertemporal substitution is low, and that output volatility rankings do not induce similar welfare rankings. Unlike the popular presumption, money targeting always fares better for money demand shocks. For fiscal shocks, money targeting does better for low and worse for high degree of intertemporal substitution. The opposite pattern obtains for supply shocks.
Keywords: macroeconomic volatility; Poole targeting; welfare
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money targeting (E42) | higher welfare (I31) |
| risk aversion (D81) | effectiveness of interest rate targeting vs money targeting (E52) |
| interest rate targeting (when risk aversion is high) (E43) | better results (C52) |
| interest rate targeting (when risk aversion is low) (E43) | worse results (Y10) |
| risk aversion (D81) | output volatility (E23) |
| interest rate targeting (E43) | stabilizing output (when risk aversion is high) (D11) |