Working Paper: NBER ID: w12515
Authors: Frederic S. Mishkin
Abstract: This paper, which is the introductory chapter in my book, "Monetary Policy Strategy", forthcoming from MIT Press, outlines how thinking in academia and central banks about monetary policy strategy has evolved over time. It shows that six ideas that are now accepted by monetary authorities and governments in almost all countries of the world have led to improved monetary performance: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is subject to the time-inconsistency problem; 5) central bank independence helps improve the efficacy of monetary policy; and 6) a strong nominal anchor is the key to producing good monetary policy outcomes.
Keywords: No keywords provided
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| no long-run tradeoff between output, employment, and inflation (E31) | higher inflation without improving employment (E31) |
| expectations play a critical role in monetary policy outcomes (E61) | anticipated policy actions do not influence real economic outcomes (D78) |
| unanticipated monetary policy can affect output (E60) | only unanticipated monetary policy can affect output (E19) |
| high costs of inflation (E31) | low and stable inflation is beneficial for economic growth (E31) |
| central bank independence enhances efficacy of monetary policy (E58) | insulating it from political pressures (D73) |
| strong nominal anchor is essential for good monetary policy outcomes (E61) | maintaining price stability and managing inflation expectations (E31) |