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The Role of Output Stabilization in the Conduct of Monetary Policy

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  • Frederic S. Mishkin

Abstract

This paper examines the role of output stabilization in the conduct of monetary policy. It argues that activist monetary policy – in which the monetary authorities focus on output fluctuations in the setting of their policy instrument and in policy statements – is likely to produce worse outcomes for output and inflation fluctuations, because it will lead to suboptimal monetary policy, but also because it complicates monetary authorities’ communication strategy and can weaken the credibility of the central bank. In contrast, conducting monetary policy with a flexible inflation target rule is likely to produce better outcomes. A flexible inflation target rule also allows the monetary authorities to communicate effectively to the public that they do care about output fluctuations, but makes it less likely that they will be encouraged to try to exploit the short–run trade–off between output and inflation.

Suggested Citation

  • Frederic S. Mishkin, 2002. "The Role of Output Stabilization in the Conduct of Monetary Policy," International Finance, Wiley Blackwell, vol. 5(2), pages 213-227.
    • Handle: RePEc:bla:intfin:v:5:y:2002:i:2:p:213-227
    DOI: 10.1111/1468-2362.00095
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    Cited by:

    1. Gilberto Libânio, 2010. "A note on inflation targeting and economic growth in Brazil," Brazilian Journal of Political Economy, Center of Political Economy, vol. 30(1), pages 73-88.
    2. Apanisile Olumuyiwa Tolulope, 2013. "A Bound Test Analysis of Effects of Monetary Policy Shocks on Output and Prices in Nigeria 2000-2010," Journal of Economics and Behavioral Studies, AMH International, vol. 5(3), pages 136-147.
    3. Simplice A. Asongu, 2014. "Correcting Inflation with Financial Dynamic Fundamentals: Which Adjustments Matter in Africa?," Journal of African Business, Taylor & Francis Journals, vol. 15(1), pages 64-73, April.
    4. Hughes Hallett Andrew & Nicola Acocella, "undated". "Stabilization and expanded commitment: a theory of forward guidance for economies with rational expectations," Working Papers 132/14, Sapienza University of Rome, Metodi e Modelli per l'Economia, il Territorio e la Finanza MEMOTEF.
    5. Jesus Garcia-Iglesias, 2007. "How the European Central Bank decided its early monetary policy?," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 927-936.
    6. Antonio Forte, 2009. "The pass-through effect: a twofold analysis," EERI Research Paper Series EERI_RP_2009_08, Economics and Econometrics Research Institute (EERI), Brussels.
    7. A. Asongu, Simplice & E. Folarin, Oludele & Biekpe, Nicholas, 2020. "The Long-Run Stability of Money in the ProposedE ast AfricanMonetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 35(3), pages 457-478.
    8. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, September.
    9. Drama Bedi Guy Herve, 2017. "Estimation of the Impact of Monetary Policy on Economic Growth: The Case of Cote d Ivoire in Line with SVAR Methodology," Applied Economics and Finance, Redfame publishing, vol. 4(4), pages 66-83, July.
    10. Crowley, Patrick M. & Hallett, Andrew Hughes, 2018. "What causes business cycles to elongate, or recessions to intensify?," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 338-349.
    11. David Navrátil, 2004. "Systematická složka měnové politiky ČNB v režimu cílování inflace [Systematic part of CNB's monetary policy in inflation targeting regime]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(5), pages 623-636.
    12. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    13. Starr, Martha A., 2005. "Does money matter in the CIS? Effects of monetary policy on output and prices," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 441-461, September.
    14. Lees, Kirdan, 2007. "How large are the gains to commitment policy and optimal delegation for New Zealand?," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 959-975, December.
    15. Lars E. O. Svensson, 2005. "Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?," Review, Federal Reserve Bank of St. Louis, vol. 87(Sep), pages 613-626.
    16. O. Evans, 2019. "Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?," Journal of African Business, Taylor & Francis Journals, vol. 20(3), pages 392-406, July.
    17. Gilberto Libanio, 2005. ""Good governance" in monetary policy and the negative real effects of inflation targeting in developing economies," Textos para Discussão Cedeplar-UFMG td277, Cedeplar, Universidade Federal de Minas Gerais.
    18. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, March.
    19. Moses K. Tule & Oloruntoba S. Ogundele & Martins O. Apinran, 2018. "Efficacy of Monetary Policy Instruments on Economic Growth: Evidence from Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(10), pages 1239-1256, October.

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