Working Paper: NBER ID: w9291
Authors: Frederic S. Mishkin
Abstract: This paper examines the role of output stabilization in the conduct of monetary policy. It argues that activist monetary policy in which the monetary authorities focus on output fluctuations in the setting of their policy instrument and in policy statements is likely to produce worse outcomes for output and inflation fluctuations, both because it will lead to suboptimal monetary policy, but also because it complicates monetary authorities' communication strategy and can weaken the credibility of the central bank. In contrast, conducting monetary policy with a flexible inflation target rule is likely to produce better outcomes. A flexible inflation target rule also allows the monetary authorities to effectively communicate to the public that they do care about output fluctuations, but makes it less likely that they will be encouraged to try to exploit the short-run tradeoff between output and inflation.
Keywords: No keywords provided
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| activist monetary policy (E63) | worse outcomes for output fluctuations (E32) |
| activist monetary policy (E63) | worse outcomes for inflation fluctuations (E31) |
| activist monetary policy (E63) | negative impacts on output fluctuations (E32) |
| activist monetary policy (E63) | negative impacts on inflation (E31) |