Monetary Policy Strategies: From Rules to Central Bank Contracts under Contingent Target Agreements

  • Alexander Karmann
Conference paper
Part of the Contributions to Economics book series (CE)


The rules-versus-discretion debate in monetary policy is at least 150 years old, as Stanley Fischer (1990) points out. For a long time, until 1977, the advocates of discretionary policy strategies could refer to the fact that, methodologically, any rule could be adopted by some discretionary policy. Due to the problem of time inconsistency, as in the Barro-Gordon model of 1983, a simple rule seems to be superior to discretionary policy, at least in deterministic models. But simple rules do not solve the trade-off between optimal, i.e. flexible, and credible policies in models with stochastic supply disturbances. The rules debate still touches on the recent discussion of credible institutional arrangements for monetary policy like central bank contracting in the presence of informational asymmetries (Walsh (1995a)). The question to be answered in designing optimal institutional mechanisms is to what extent discretionary power should be given to the central bank to engage in stabilization, based on its private information. McCallum (1995) already pointed out that even central bank contracting may not solve the credibility problem since there is no ex-post incentive for the government to realize the sanctions included into the contract when not achieving the contracted targets. This view seems to be supported by recent historical experience with the New Zealand 1989 Act.


Monetary Policy Central Bank Money Supply Reaction Function Inflation Target 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Asako, K. and H. Wagner (1992), Nominal Income Targeting versus Money Supply Targeting, Scottish Journal of Political Economy 39, 167–87.CrossRefGoogle Scholar
  2. Barro, R. J. and D. B. Gordon (1983), Rules, Discretion, and Reputation in a Model of Monetary Policy, Journal of Monetary Economics 12, 101–20.CrossRefGoogle Scholar
  3. Bean, C. R. (1983), Targeting Nominal Income: An Appraisal, Economic Journal 93, 806–19.CrossRefGoogle Scholar
  4. Blinder, A. (1997), What Central Bankers Could Learn from Academics — and Vice Versa, Journal of Economic Perspectives 11, 3–19.CrossRefGoogle Scholar
  5. Brash, D. T. (1997), The New Inflation Target, and New Zealanders’ Expectations about Inflation and Growth, Speech, January 23, Reserve Bank of New Zealand.Google Scholar
  6. Canzoneri, M. B. (1985), Monetary Policy Games and the Role of Private Information, American Economic Review 75, 1056–70.Google Scholar
  7. Cecchetti, S. G. (1998), Central Bank Policy Rules: Conceptual Issues and Practical Considerations, this volume.Google Scholar
  8. Fischer, S. (1990), Rules Versus Discretion in Monetary Policy, in: B. M. Friedman and F. H. Hahn (eds.), Handbook of Monetary Economics, Vol. II, Amsterdam, 1155–84.Google Scholar
  9. Friedman, B. M. (1990), Targets and Instruments of Monetary Policy, in: B. M. Friedman and F. H. Hahn (eds.), Handbook of Monetary Economics, Vol. II, Amsterdam, 1185–1230.Google Scholar
  10. Friedman, M. (1959), A Program for Monetary Stability, New York.Google Scholar
  11. Funke, N. (1995), Nominale Anker als geldpolitische Koordinationsziele, Tübingen.Google Scholar
  12. Karmann, A. (1993), Financial Deregulation and Macroeconomic Stabilization Rules, in: W. E. Diewert e.a. (eds.), Mathematical Modelling in Economics, Berlin, 622–31.CrossRefGoogle Scholar
  13. Karmann, A. (1995), Multiple-Task and Multiple-Agent Models, Annals of Operations Research No. 54, 57–78.CrossRefGoogle Scholar
  14. McCallum, B. (1986), Some Issues Concerning Interest Rate Pegging, Price Level Determinacy, and the Real Bills Doctrine, Journal of Monetary Economics 17, 135–60.CrossRefGoogle Scholar
  15. McCallum, B. (1995), Two Fallacies Concerning Central Bank Independence, American Economic Review 85, Papers and Proceedings, 207–11.Google Scholar
  16. Poole, W. (1970), Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model, Quarterly Journal of Economics 84, 197–216.CrossRefGoogle Scholar
  17. Svensson, L. E. O. (1997), Inflation Targeting: Some Extensions, Working Paper, Stockholm University.Google Scholar
  18. Walsh, C. E. (1995a), Optimal Contracts for Central Bankers, American Economic Review 85, 150–67.Google Scholar
  19. Walsh, C. E. (1995b), Is New Zealand’s Reserve Bank Act of 1989 an Optimal Central Bank Contract? Journal of Money, Credit, and Banking 27, 1179–91.CrossRefGoogle Scholar

Copyright information

© Physica-Verlag Heidelberg 1998

Authors and Affiliations

  • Alexander Karmann
    • 1
  1. 1.University of DresdenDresdenGermany

Personalised recommendations