Views expressed are those of the authors and do not necessarily reflect those of Bank of Finland. This paper was written while Leitemo was visiting the Bank of Finland as a visiting scholar. The Bank of Finland's hospitality is greatly appreciated. We are grateful to Tuomas Takalo and Jouko Vilmunen for comments to an earlier draft of this paper.
Model Uncertainty and Delegation: A Case for Friedman's k-Percent Money Growth Rule?
Version of Record online: 29 MAR 2008
©2008 The Ohio State University
Journal of Money, Credit and Banking
Volume 40, Issue 2-3, pages 547–556, March/April 2008
How to Cite
KILPONEN, J. and LEITEMO, K. (2008), Model Uncertainty and Delegation: A Case for Friedman's k-Percent Money Growth Rule?. Journal of Money, Credit and Banking, 40: 547–556. doi: 10.1111/j.1538-4616.2008.00127.x
- Issue online: 29 MAR 2008
- Version of Record online: 29 MAR 2008
- Received August 31, 2005; and accepted in revised form January 3, 2007.
- policy robustness;
- money growth targeting;
- inflation targeting;
- Friedman rule
Model uncertainty affects the monetary policy delegation problem. If there is uncertainty with regards to the determination of the delegated objective variables, the central bank will want robustness against potential model misspecifications. We show that with plausible degree of model uncertainty, delegation of the Friedman rule of increasing the money stock by k percent to the central bank will outperform commitment to the social loss function (flexible inflation targeting). The reason is that the price paid for robustness under flexible inflation targeting outweighs the inefficiency of money growth targeting. Imperfect control of money growth does not change this conclusion.