Designing a Simple Loss Function for Central Banks
Title | Designing a Simple Loss Function for Central Banks PDF eBook |
Author | Davide Debortoli |
Publisher | International Monetary Fund |
Pages | 56 |
Release | 2017-07-21 |
Genre | Business & Economics |
ISBN | 1484311752 |
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
The Making of Optimal and Consistent Policy
Title | The Making of Optimal and Consistent Policy PDF eBook |
Author | Huiping Yuan |
Publisher | |
Pages | 29 |
Release | 2008 |
Genre | |
ISBN |
This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. As a result, the social loss function cannot serve as a direct loss function for the central bank. Accordingly, we employ implementation theory to design a central bank loss function (mechanism design) with consistent targets, while the social loss function serves as a social welfare criterion. That is, with the correct mechanism design for the central bank loss function, optimal policy and consistent policy become identical. In other words, optimal policy proves implementable (consistent).
Capitalizing Central Banks
Title | Capitalizing Central Banks PDF eBook |
Author | Mr.Alain Ize |
Publisher | International Monetary Fund |
Pages | 27 |
Release | 2005-01-01 |
Genre | Business & Economics |
ISBN | 145186034X |
This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.
Would it be Optimal for Central Banks to Include Asset Prices in Their Loss Function?
Title | Would it be Optimal for Central Banks to Include Asset Prices in Their Loss Function? PDF eBook |
Author | Alain Durré |
Publisher | |
Pages | |
Release | 2001 |
Genre | |
ISBN |
The Federal Reserve System Purposes and Functions
Title | The Federal Reserve System Purposes and Functions PDF eBook |
Author | Board of Governors of the Federal Reserve System |
Publisher | |
Pages | 0 |
Release | 2002 |
Genre | Banks and Banking |
ISBN | 9780894991967 |
Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.
Should Inequality Factor Into Central Banks' Decisions?
Title | Should Inequality Factor Into Central Banks' Decisions? PDF eBook |
Author | Niels-Jakob Harbo Hansen |
Publisher | |
Pages | 0 |
Release | 2023 |
Genre | |
ISBN |
The Oxford Handbook of the Economics of Central Banking
Title | The Oxford Handbook of the Economics of Central Banking PDF eBook |
Author | David G. Mayes |
Publisher | Oxford University Press |
Pages | 656 |
Release | 2019-02-15 |
Genre | Business & Economics |
ISBN | 0190626216 |
The economic influence of central banks has received ever more attention given their centrality during the financial crises that led to the Great Recession, strains in the European Union, and the challenges to the Euro. The Oxford Handbook of the Economics of Central Banking reflects the state of the art in the theory and practice and covers a wide range of topics that will provide insight to students, scholars, and practitioners. As an up to date reference of the current and potential challenges faced by central banks in the conduct of monetary policy and in the search for the maintenance of financial system stability, this Oxford Handbook covers a wide range of essential issues. The first section provides insights into central bank governance, the differing degrees of central bank independence, and the internal dynamics of their decision making. The next section focuses on questions of whether central banks can ameliorate fiscal burdens, various strategies to affect monetary policy, and how the global financial crisis affected the relationship between the traditional focus on inflation targeting and unconventional policy instruments such as quantitative easing (QE), foreign exchange market interventions, negative interest rates, and forward guidance. The next two sections turn to central bank communications and management of expectations and then mechanisms of policy transmission. The fifth part explores the challenges of recent developments in the economy and debates about the roles central banks should play, focusing on micro- and macro-prudential arguments. The implications of recent developments for policy modeling are covered in the last section. The breadth and depth enhances understanding of the challenges and opportunities facing central banks.