Working Paper

Targeting vs. instrument rules for monetary policy

Abstract: Svensson (2003) argues strongly that specific targeting rules*first order optimality conditions for a specific objective function and model*are normatively superior to instrument rules for the conduct of monetary policy. That argument is based largely upon four main objections to the latter plus a claim concerning the relative interest-instrument variability entailed by the two approaches. The present paper considers the four objections in turn, and advances arguments that contradict all of them. Then in the paper*s analytical sections, it is demonstrated that the variability claim is incorrect, for a neo-canonical model and also for a variant with one-period-ahead plans used by Svensson, providing that the same decision-making errors are relevant under the two alternative approaches. Arguments relating to general targeting rules and actual central bank practice are also included.

Keywords: Monetary policy; Banks and banking, Central;

Status: Published in Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), pp. 597-611

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2004

Number: 2004-011