Working Paper: CEPR ID: DP9567
Authors: Ricardo Reis
Abstract: What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design.
Keywords: mechanism design; monetary policy
JEL Codes: E50; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank independence (E58) | macroeconomic stability (E60) |
| inflation targeting (E31) | economic performance (P17) |
| transparency of central bank actions (E58) | private agents' expectations (L85) |
| price-level targeting (E31) | variance of inflation (E31) |
| price-level targeting (E31) | variance of real activity (E39) |
| central bank's commitment to price stability (E58) | overall economic stability (E66) |
| dual mandate (F54) | stable macroeconomic environment (E60) |