Price stability and monetary policyA proposal of a non active policy rule

  1. Castañeda Fernández, Juan E.
  2. Wood, Geoffrey
Revista:
Cuadernos de economía: Spanish Journal of Economics and Finance

ISSN: 2340-6704,  0210-0266

Año de publicación: 2011

Volumen: 34

Número: 95

Páginas: 62-72

Tipo: Artículo

DOI: 10.1016/S0210-0266(11)70007-3 DIALNET GOOGLE SCHOLAR lock_openBiblos-e Archivo editor

Otras publicaciones en: Cuadernos de economía: Spanish Journal of Economics and Finance

Objetivos de desarrollo sostenible

Resumen

A new type of monetary policy rule designed to achieve both price and output stability has increasingly been recommended during the last business cycle expansion, prior to the 2007 crisis. This type of rule implies "active" reaction functions. Based on the new Keynesian approach to monetary economics, these rules prescribe an active response by the central bank in the face of any shock that shifts prices or output from target, which leads to excessive money creation. Here, a less active type of reaction function is proposed; one in which price stability is the long run target, but permitting prices to respond to changes originating in real disturbances. It is argued that the resulting policy delivers outcomes preferable to currently popular rules.

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We want to thank the participants of the seminars at Cass Business School (London) and CEU (Madrid) for their helpful comments. This paper was developed whilst Juan Castañeda was a visiting scholar in Cass Business School and received financial support from Fundación Caja de Madrid and UNED. Juan Castañeda also wants to thank Pedro Schwartz’s early comments on the topic addressed in the paper.

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