Optimal Simple Objectives for Monetary Policy When Banks Matter

60 Pages Posted: 5 Jan 2021

See all articles by Lien Laureys

Lien Laureys

Bank of England

Roland Meeks

International Monetary Fund

Boromeus Wanengkirtyo

Bank of England

Multiple version iconThere are 3 versions of this paper

Date Written: November 1, 2020

Abstract

We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.

JEL Classification: E17, E52, E58, G21, E23, E31, B26

Suggested Citation

Laureys, Lien and Meeks, Roland and Wanengkirtyo, Boromeus, Optimal Simple Objectives for Monetary Policy When Banks Matter (November 1, 2020). IMF Working Paper No. 20/244, Available at SSRN: https://ssrn.com/abstract=3758077

Lien Laureys (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Roland Meeks

International Monetary Fund ( email )

Kuwait

Boromeus Wanengkirtyo

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
8
Abstract Views
40
PlumX Metrics