TY - JOUR
AU - Ball,Laurence
TI - Efficient Rules for Monetary Policy
JF - National Bureau of Economic Research Working Paper Series
VL - No. 5952
PY - 1997
Y2 - March 1997
DO - 10.3386/w5952
UR - http://www.nber.org/papers/w5952
L1 - http://www.nber.org/papers/w5952.pdf
N1 - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu
AB - This paper defines an efficient rule for monetary policy as one that minimizes a weighted sum of output variance and inflation variance. It derives several results about the efficiency of alternative rules in a simple macroeconomic model. First, efficient rules can be expressed as 'Taylor rules' in which interest rates respond to output and inflation. But the coefficients in efficient Taylor rules differ from the coefficients that fit actual policy in the United States. Second, inflation targets are efficient. Indeed, the set of efficient rules is equivalent to the set of inflation-target policies with different speeds of adjustment. Finally, nominal-income targets are not merely inefficient, but disastrous: they imply that output and inflation have infinite variances.
ER -