Robustness in Monetary Policymaking: A Case for the Friedman Rule

22 Pages Posted: 30 Aug 2007

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Kai Leitemo

Norwegian School of Management

Date Written: August 2007

Abstract

Inflation targeting involves using all available information in stabilizing inflation around some target rate (Svensson, 2003). Inflation is typically at the very end of the transmission mechanism and hence its determination is subject to much model uncertainty which the central bank will want to guard against using robust policies. Such robustness comes however with the cost of increased social loss under the most likely description of the economy. We show that with a sufficiently high degree of model uncertainty, adherence to the Friedman rule of increasing the money stock by k percent will be superior as the price paid for robustness is smaller.

Keywords: policy robustness, money growth targeting, inflation targeting, Friedman rule

JEL Classification: E42, E52, E58, E61

Suggested Citation

Kilponen, Juha and Leitemo, Kai, Robustness in Monetary Policymaking: A Case for the Friedman Rule (August 2007). Bank of Finland Research Discussion Paper No. 4/2006. Available at SSRN: https://ssrn.com/abstract=1010594 or http://dx.doi.org/10.2139/ssrn.1010594

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Kai Leitemo

Norwegian School of Management ( email )

P.O. Box 580
N-1302 Sandvika
Norway
+47 6755 7477 (Phone)
+47 6755 7675 (Fax)

HOME PAGE: http://economics.no

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
40
Abstract Views
394
PlumX Metrics