A mandate framework is proposed for delegating monetary policy to an instrumentindependent, but goal-dependent central bank that emphasizes simplicity in both the objectives
entering the welfare criterion and those in the instrument rule. It consists of: (i) a simple
quadratic loss function penalizing deviations from target variables; ...
A mandate framework is proposed for delegating monetary policy to an instrumentindependent, but goal-dependent central bank that emphasizes simplicity in both the objectives
entering the welfare criterion and those in the instrument rule. It consists of: (i) a simple
quadratic loss function penalizing deviations from target variables; (ii) a welfare-optimized,
Taylor-type log-linear nominal interest-rate rule with targets that match those in the loss
function (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate imposing a
low unconditional probability of ZLB episodes and (iv) a long-run inflation target. In an
estimated New Keynesian model with these features we find that for a quarterly probability
of 5%, an optimal annual inflation target is close to 2%, weights for real variables in the loss
function are small compared with inflation except for the real wage growth mandate and the
optimized rules mimic a price-level rule.
