No 123. Targeting inflation with a prominent role for money

by Ulf Söderström

Abstract: This paper demonstrates how a target for money growth can be beneficial for an inflation targeting central bank acting under discretion. Because the growth rate of money is closely related to the change in the interest rate and he growth of real output, delegating a money growth target to the central bank makes discretionary policy more inertial, leading to better social outcomes. This delegation scheme is also compared with other schemes suggested in the literature. Although other delegation schemes are sometimes more efficient, the results indicate that giving a prominent role to a money growth indicator can be a sensible strategy for monetary policy.

Keywords: Discretion, commitment, monetary policy inertia, inflation targeting, monetary targeting.

JEL Classification: E41, E51, E52, E58.