{
  "title": "Optimal Simple Objectives for Monetary Policy when Banks Matter",
  "publication": "IMF Working Papers, November 13, 2020",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2020/11/13/optimal-simple-objectives-for-monetary-policy-when-banks-matter-49872",
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  "summary": "We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability.",
  "sections": [
    {
      "heading": "Summary and main findings",
      "content": "- Reconsiders welfare-optimal monetary policy design when financing frictions impair the supply of bank credit and when policy objectives must be simple and implementable.\n- A flexible inflation targeting rule that places weight on:\n  - stabilizing inflation,\n  - a measure of resource utilization, and\n  - a financial variable\n  produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy.\n- In the authors’ estimated model of the euro area, the macro-financial trade-off is modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation.\n- A range of different financial objectives and policy preferences lead to similar conclusions."
    },
    {
      "heading": "Model, scope, and subjects",
      "content": "- Focus: interaction of monetary policy and banks under financing frictions affecting bank credit supply.\n- Geographic/econometric scope: estimated model of the euro area.\n- Subject classifications listed on the page:\n  - Economic theory\n  - Financial frictions\n  - Inflation\n  - Inflation targeting\n  - Monetary policy\n  - Output gap\n  - Prices\n  - Production\n  - Production growth\n- Keywords provided on the page include: Banks, Euro area economy, Financial frictions, Inflation, Inflation targeting, inflation-output gap trade-off, Medium-scale DSGE models, Monetary policy, Output gap, output gap stabilization, output gap volatility, output gap-inflation trade-off, Production growth, Simple loss function, stabilization objective, WP"
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Simple, implementable objectives that augment standard flexible inflation targeting with a financial variable and a measure of resource utilization can achieve near-Ramsey welfare outcomes.\n- Policymakers in the euro area context can address financial-frictions-induced distortions with limited inflation cost.\n- Robustness: similar outcomes arise across different choices of financial objectives and alternative policy preferences, suggesting broad applicability of the simple-objectives approach."
    },
    {
      "heading": "Publication and document metadata",
      "content": "- Title: Optimal Simple Objectives for Monetary Policy when Banks Matter\n- Authors: Lien Laureys, Roland Meeks, Boromeus Wanengkirtyo\n- Publication date: November 13, 2020\n- Series: Working Paper No. 2020/244\n- Issue: 244\n- Volume: 2020\n- Pages: 59\n- DOI: https://doi.org/10.5089/9781513561172.001\n- Stock No: WPIEA2020244\n- ISBN: 9781513561172\n- ISSN: 1018-5941\n\nSource: Optimal Simple Objectives for Monetary Policy when Banks Matter (IMF Working Paper No. 2020/244).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2020/11/13/optimal-simple-objectives-for-monetary-policy-when-banks-matter-49872"
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    "Authors: Lien Laureys, Roland Meeks, Boromeus Wanengkirtyo",
    "Published: November 13, 2020",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513561172.001",
    "Reconsiders welfare-optimal monetary policy design when financing frictions impair the supply of bank credit and when policy objectives must be simple and implementable.",
    "A flexible inflation targeting rule that places weight on:",
    "In the authors’ estimated model of the euro area, the macro-financial trade-off is modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation.",
    "A range of different financial objectives and policy preferences lead to similar conclusions.",
    "Focus: interaction of monetary policy and banks under financing frictions affecting bank credit supply.",
    "Geographic/econometric scope: estimated model of the euro area.",
    "Subject classifications listed on the page:",
    "Keywords provided on the page include: Banks, Euro area economy, Financial frictions, Inflation, Inflation targeting, inflation-output gap trade-off, Medium-scale DSGE models, Monetary policy, Output gap, output gap stabilization, output gap volatility, output gap-inflation trade-off, Production growth, Simple loss function, stabilization objective, WP",
    "Simple, implementable objectives that augment standard flexible inflation targeting with a financial variable and a measure of resource utilization can achieve near-Ramsey welfare outcomes.",
    "Policymakers in the euro area context can address financial-frictions-induced distortions with limited inflation cost.",
    "Robustness: similar outcomes arise across different choices of financial objectives and alternative policy preferences, suggesting broad applicability of the simple-objectives approach.",
    "Title: Optimal Simple Objectives for Monetary Policy when Banks Matter",
    "Authors: Lien Laureys, Roland Meeks, Boromeus Wanengkirtyo",
    "Publication date: November 13, 2020",
    "Series: Working Paper No. 2020/244",
    "Issue: 244",
    "Volume: 2020",
    "Pages: 59",
    "DOI: https://doi.org/10.5089/9781513561172.001",
    "Stock No: WPIEA2020244",
    "ISBN: 9781513561172",
    "ISSN: 1018-5941",
    "**Working Paper**"
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