Day Two Keynote Address: Goals and Rules in Central Bank Design
- Author(s): Walsh, Carl E
- et al.
Beginning with the Reserve Bank of New Zealand Act of 1989, central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable. Inflation-targeting regimes provide examples of such goal-based policy frameworks. An alternative approach relies on a rule-based framework in which the policy authorities are judged on whether they set their instrument in a manner consistent with a legislated rule. I consider the performance of goal-based and rule-based frameworks. I first show analytically that both goal-based and rule-based systems balance a trade-off between reducing sources of policy distortions and preserving policy flexibility. Then, using an estimated DSGE model, I find the optimal weights to place on goal-based and rule-based performance measures. When the rule is similar to that proposed recently in U.S. H.R. 5108, I find that the optimal weight to assign to the rule-based performance measure is zero. However, when the rule is based on the output efficiency gap, it is generally optimal to make deviations from the rule a part of the central bank’s performance measure.