## Optimal Simple Objectives for Monetary Policy when Banks Matter

_IMF Working Papers, November 13, 2020_

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## Bibliographic details
- Authors: Lien Laureys, Roland Meeks, Boromeus Wanengkirtyo
- Published: November 13, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513561172.001

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### Summary and main findings
- 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:
  - stabilizing inflation,
  - a measure of resource utilization, and
  - a financial variable
  produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy.
- 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.

### Model, scope, and subjects
- 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:
  - Economic theory
  - Financial frictions
  - Inflation
  - Inflation targeting
  - Monetary policy
  - Output gap
  - Prices
  - Production
  - Production growth
- 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

### Policy implications and recommendations
- 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.

### Publication and document metadata
- 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

*Source: Optimal Simple Objectives for Monetary Policy when Banks Matter (IMF Working Paper No. 2020/244).*

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_Source: https://www.imf.org/en/publications/wp/issues/2020/11/13/optimal-simple-objectives-for-monetary-policy-when-banks-matter-49872_