Research Discussion Papers, Bank of Finland
No 4/2006:
Robustness in monetary policymaking: a case for the Friedman rule
Juha Kilponen ()
and Kai Leitemo ()
Abstract: Inflation targeting involves using all available
information in stabilizing inflation around some target rate (Svensson,
2003). Inflation is typically at the very end of the transmission mechanism
and hence its de-termination is subject to much model uncertainty which the
central bank will want to guard against using robust policies. Such
robustness comes however with the cost of increased social loss under the
most likely description of the economy. We show that with a sufficiently
high degree of model uncertainty, ad-herence to the Friedman rule of
increasing the money stock by k percent will be superior as the price paid
for robustness is smaller.
Keywords: policy robustness; money growth targeting; inflation targeting; Friedman rule; (follow links to similar papers)
JEL-Codes: E42; E52; E58; E61; (follow links to similar papers)
22 pages, April 19, 2006
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