Lecturer: Kenneth Kuttner (bio)

Summary

In recent years, there has been a growing tendency to think about monetary policy more systematically, in terms of a monetary policy framework characterizing the institutional setting and objectives of the central bank, or more narrowly in terms of a policy rule guiding—and perhaps constraining—monetary policy actions. Historically, one of the most popular policy frameworks has involved an exchange rate peg of some sort. But over the past 15 years, inflation targeting has emerged as a leading alternative to exchange-rate based frameworks, in many cases replacing exchange-rate pegs.

Drawing on the readings listed below, and participants’ own experiences, the groups will discuss the key elements of monetary policy frameworks, and the considerations that go into choosing one framework over another. Another topic for discussion will be the differences between a policy framework and a policy rule, the extent to which monetary policy should be “rules-based,” and the sense in which either an exchange rate peg or inflation targeting can be thought of as a monetary policy rule.

Participants should prepare by reading the two article excerpts listed below under the “Frameworks and rules” heading, and by familiarizing themselves with their own countries’ policy frameworks. In addition, participants may choose to read either the two excerpts listed below under “Inflation targeting and policy rules,” or the two excerpts under the “Exchange rate as a nominal anchor” heading. Each participant should come prepared to describe his or her own country’s monetary policy framework as a point of departure in the discussion group.
The following questions for discussion might help you focus your preparation:

Questions for Discussion ››

Frameworks and rules

Fry, Maxwell et al. (2000), “Key issues in the Choice of Monetary Policy Framework.” In Lavan Mahadeva and Gabriel Sterne, eds., Monetary Policy Frameworks in a Global Context. London: Routledge, ch.1, pp. 3-17.

Blinder, Alan (1998), Central Banking in Theory and Practice, MIT Press, pages 36-50.

Inflation targeting and policy rules

Kuttner, Kenneth N. (2004). “The Role of Policy Rules in Inflation Targeting,”
Federal Reserve Bank of Saint Louis Review 86 (4), pp. 89–112, especially pages 89-94.

Archer, David (2003). “Are the policy rules proposed in the literature good enough for practical use?”
Paper prepared for the Norges Bank Workshop, “The role of monetary policy rules in inflation targeting regimes: theory meets practice,” especially pages 1-11.

The exchange rate as a nominal anchor

Mussa, Michael, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andrew Berg (2000), “Exchange Rate Regimes in an Increasingly Integrated World Economy,” IMF Occasional Paper #193, ch. 3, pp. 23-33.

Fischer, Stanley. 2001. “Exchange Rate Regimes: Is the Bipolar View Correct?” Distinguished Lecture on Economics in Government at the Meetings of the American Economic Association, New Orleans, January 6, 2001.

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