In this paper, I focus on two aspects of central banking – flexibility and transparency – that have been affected by monetary policy debates over the past twenty years. Because criticism of inflation targeting, at least in the United States, often focuses on the claim that an inflation targeting central bank may ignore real economic fluctuations, I direct my comments to the role real objectives play in the design of optimal monetary policy. That is, I focus on how flexible the central bank should be. I argue that, while the recent trend in the academic literature to view central bank objectives as derived from the welfare of the representative agent can be insightful, this perspective is not the only one for thinking about the goals assigned to the central bank. There are reasons why the objectives of a central bank should, potentially, deviate from social welfare, and I will focus on two such reasons; one related to imperfect monitoring and accountability, the other arising from asymmetric information.
JEL Codes: E52, E58
Keywords: Central Banks, Monetary Policy, Inflation Targeting.
Issued: December 2007
Download: RPN No. 2/2007 (pdf, 358 kB)