The gains from delegation revisited: price-level targeting, speed-limit and interest rate smoothing policies

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 March 2011

Working Paper No. 415
By Andy Blake, Tatiana Kirsanova and Tony Yates

 A commonly held view is that the life of a monetary policy maker forced to operate under discretion can be improved by the authorities delegating monetary policy objectives that are different from the social welfare function (including interest rate smoothing, price-level targeting and speed-limit objectives). We show that this holds with much less generality than previously realised. The reason is that in monetary policy models with capital accumulation (or similar variables) there may be multiple equilibria under discretion. Delegating modified objectives to the monetary policy maker does not change this. We find that the best equilbria under delegation are sometimes inferior to the worse ones without delegation. In general the welfare benefits of schemes like price-level targeting must be regarded as ambiguous.

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