Tinbergen Rules the Taylor Rule

Michl, Thomas

doi:10.2139/ssrn.890671

Cited by 5 publications

(6 citation statements)

References 5 publications

(1 reference statement)

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“…Much of the debate has centred on the dual use of the main monetary policy instrument, the short-term interest rate, for achieving both price and financial stability objectives (Issing, 2011). If only one policy instrument is available but two objectives are set, the Tinbergen rule implies that policymakers can only achieve one objective, which, at best, could be a convex combination of the two objectives (Michl, 2006). In this vein, Svensson (2017) has demonstrated the limited effectiveness of the short-term interest rate in ensuring financial stability.…”

Section: Resilience and Taming The Financial Cycle – The Two Objectives Of Macroprudential Policymentioning

confidence: 99%

Macroprudential policy – closing the financial stability gap

Fahr

Fell

2017

JFRC

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Purpose The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives. Design/methodology/approach Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves. Findings This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience. Originality/value The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

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Section: Resilience and Taming The Financial Cycle – The Two Objectives Of Macroprudential Policymentioning

confidence: 99%

Macroprudential policy – closing the financial stability gap

Fahr

Fell

2017

JFRC

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“…First, they do not simulate the impact of IT relative to other possible policy regimes, such as targeting the real exchange rate as discussed below. Second)he model is based on esti mates of potential output that are themselves affected by monetary policy (see, for example, Michl, 2007;Tobin, 1980). Hence, if monetary policy slows economic growth, it also lowers the rate or growth of potential output and, therefore, reduces the gap between the two, thereby appearing to stabilize the economy.…”

Section: 2 Macroeconomic Record Of Inflation Targetingmentioning

confidence: 99%

Beyond Inflation Targeting: Assessing the Impacts and Policy Alternatives

Epstein¹,

Yeldan²

2009

Beyond Inflation Targeting

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“…27 See also Michl (2006) on the pitfalls of inflation targeting suggested by the Tinbergen principle. 28 Incomes policies are defined in very general terms here as "formal and/or informal institutions that frame and mediate aggregate wage and price setting behaviour in such a way as to reduce conflict over income shares and better reconcile conflicting income claims" (Setterfield, 2007a, p.129).…”

Section: [Figure 2 Goes Here]mentioning

confidence: 99%

Macroeconomics without the LM curve: an alternative view

Setterfield

2008

Cambridge Journal of Economics

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This paper develops a "fully articulated" Post Keynesian alternative to the "New Consensus" macroeconomic model, based on explicitly Post Keynesian hypotheses about the inflation process, the income-generating process and the appropriate conduct of monetary policy. The paper demonstrates how the equilibrium configuration of this model can be manipulated by non-monetary policy interventions, including fiscal policy and incomes policy. One (perhaps surprising) result that emerges from the analysis is that in the context of the proper policy environment, inflation targeting can have a positive impact on real economic performance.

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Tinbergen Rules the Taylor Rule

Cited by 5 publications

References 5 publications

Macroprudential policy – closing the financial stability gap

Macroprudential policy – closing the financial stability gap

Beyond Inflation Targeting: Assessing the Impacts and Policy Alternatives

Macroeconomics without the LM curve: an alternative view

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