Monetary Policymaking As An Optimization Exercise
6 Pages Posted: 25 Sep 2019
Date Written: September 17, 2019
Monetary policymaking can be seen as an optimization exercise to be performed by central banks. In practice, central banks can be classified according to the monetary mandate assigned to them, mainly a single or a dual mandate. Among independent central banks, a majority are single-objective targeters, while the minority exercise a dual mandate. The main argument against adopting a double mandate is an apparent inconsistency between objectives and instruments and also about a potential risk for monetary independence. This paper illustrates how both mandates can be defined as an optimization problem. The dual mandate, far from being inconsistent or a threat to monetary independence, is more effective for improving social well-being since it represents the maximization of growth subject to the minimum of inflation.
Keywords: Monetary Policy, Dual Monetary Mandate, Inflation Target, Potential Growth, Monetary Policy Rate, Optimization Model
JEL Classification: C61, E52, E58, E61, O43
Suggested Citation: Suggested Citation