Instrument rules, target rules, NGDP, complexity and learning
At one extreme you have pure discretion. The central bank does whatever it thinks is best.
At the other extreme you have an instrument rule. The rule specifies exactly how the central bank should set the monetary policy instrument, conditional on the indicators (i.e. conditional on its information). The Taylor Rule is an example of an instrument rule*; it specifies the exact setting of the interest rate as a function of recent data on output and inflation.
Somewhere in the middle you have a target rule. The central bank announces a commitment to a target, but uses its discretion on how to set the instrument, given all the information provided by the indicators, to hit that target. All inflation targeting central banks, AFAIK, fall into this category.
At the other extreme you have an instrument rule. The rule specifies exactly how the central bank should set the monetary policy instrument, conditional on the indicators (i.e. conditional on its information). The Taylor Rule is an example of an instrument rule*; it specifies the exact setting of the interest rate as a function of recent data on output and inflation.
Somewhere in the middle you have a target rule. The central bank announces a commitment to a target, but uses its discretion on how to set the instrument, given all the information provided by the indicators, to hit that target. All inflation targeting central banks, AFAIK, fall into this category.
This post is not about pure discretion; it's about instrument rules vs target rules.
This post is also, in part, a response to John Taylor's post on NGDP targeting. I stress the "in part" bit, because I don't plan to respond to everything he said. Mainly, I just want to make some conceptual distinctions.
The choice between NGDP targeting and (say) inflation targeting is a quite separate question from the choice between an instrument rule and a target rule. Central banks do not directly control either NGDP or inflation. All central banks really control is their own balance sheet, plus they control their own communications about how they will adjust that balance sheet, conditional on the indicators they observe, to try to hit some target.
Mais
This post is also, in part, a response to John Taylor's post on NGDP targeting. I stress the "in part" bit, because I don't plan to respond to everything he said. Mainly, I just want to make some conceptual distinctions.
The choice between NGDP targeting and (say) inflation targeting is a quite separate question from the choice between an instrument rule and a target rule. Central banks do not directly control either NGDP or inflation. All central banks really control is their own balance sheet, plus they control their own communications about how they will adjust that balance sheet, conditional on the indicators they observe, to try to hit some target.
Mais
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