Working Paper: NBER ID: w19187
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: No keywords provided
JEL Codes: E5; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Objective function of a central bank (E52) | Effectiveness in achieving price stability and employment goals (E52) |
| Clearer mandate focused on inflation targeting (E52) | Ability to stabilize prices (E64) |
| Resource constraints of a central bank (E58) | Policy options (D78) |
| Fiscal pressures (E62) | Higher inflation (E31) |
| Higher inflation (E31) | Economic destabilization (F69) |
| Central bank transparency and communication (E58) | Economic agents' expectations (D84) |
| Better communication (L96) | More predictable economic outcomes (P17) |
| Central bank transparency (E58) | Economic stability (E60) |