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The Impact of Central Bank Independence and Preferences on Inflation Targeting in Rule-Based and Discretionary Monetary Policy Approaches

Author

Listed:
  • Mahmoudinia, Davoud

    (Associate professor, Department of Economics at Vali-e-Asr University of Rafsanjan)

  • Abdollahinasab, Fatemeh

    (M.A in Economics, Department of Economics at Vali-e-Asr University of Rafsanjan)

Abstract

This study investigates the impact of central bank autonomy and preferences on inflation targeting within rule-based and discretionary monetary policy frameworks. Due to rational expectations, discretionary policies often lead to time inconsistency and inflationary biases. Increasing central bank independence and aligning preferences with inflation control are proposed as solutions to mitigate these biases. This study analyzes central bank preferences in rule-based and discretionary policies using a general equilibrium approach and conducts simulations. Results indicate that inflation rates are lower under rule-based policies and that increasing the central bank's conservatism and preferences reduces inflation. Additionally, econometric models show a negative relationship between central bank independence and inflation in both developed and developing countries

Suggested Citation

  • Mahmoudinia, Davoud & Abdollahinasab, Fatemeh, 2023. "The Impact of Central Bank Independence and Preferences on Inflation Targeting in Rule-Based and Discretionary Monetary Policy Approaches," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 10(4), pages 235-276, March.
    • Handle: RePEc:ris:qjatoe:0328
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    More about this item

    Keywords

    Central bank preferences; rule-based policy; discretionary policy; time inconsistency; inflation bias;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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