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An Evaluation of Monetary Targeting Regimes

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Karen Dury
Karen Dury
Affiliation:
National Institute of Economic and Social Research
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Abstract

The policy regime in Europe has put the economy on ‘auto-pilot’. We investigate different designs for the required feedback mechanisms. The uncertainty facing an economy depends on the pattern of shocks it faces, the response of the private sector to those shocks and also the policy reactions of the authorities. Two ‘ideal type’ policy regimes are investigated, and inflation targeting is compared to nominal aggregate targeting. In general it is suggested that targeting a nominal aggregate reduces the variability of the price level, and stabilises the price level more quickly over time. Inflation outcomes are also less variable for the Euro Area, and they are less asymmetric when a nominal aggregate is targeted. The new European fiscal framework requires that countries set deficit targets close to balance. We show that there is plenty of space for automatic stabilisers to work, but the room available depends in part on the monetary policy framework chosen.

Type
Research Article
Information
National Institute Economic Review , Volume 174 , October 2000 , pp. 105 - 113
Copyright
Copyright © 2000 National Institute of Economic and Social Research

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Footnotes

We would like to thank the ESRC for support under grant nos. R022250166 ‘Do Small Differences Matter? The structure and consequences of macroeconomic differences between members of EMU’ and also Project LI 38250122 ‘Fluctuations and Long-Term Prosperity: a study of the UK and International Economies’. We have benefited from cooperation with Paul Ashworth, Joe Byrne, Dawn Holland, Dirk te Velde, Andy Blake and especially Ian Hurst and Nigel Pain.

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