The Impact of Central Bank Independence and Preferences on Inflation Targeting in Rule-Based and Discretionary Monetary Policy Approaches

Document Type : Research Paper

Authors

Vali-e-Asr University of Rafsanjan

Abstract

This study investigates the impact of central bank autonomy and preferences on inflation targeting within rule-based and discretionary monetary policy frameworks. Due to rational expectations, discretionary policies often lead to time inconsistency and inflationary biases. Increasing central bank independence and aligning preferences with inflation control are proposed as solutions to mitigate these biases. This study analyzes central bank preferences in rule-based and discretionary policies using a general equilibrium approach and conducts simulations. Results indicate that inflation rates are lower under rule-based policies and that increasing the central bank's conservatism and preferences reduces inflation. Additionally, econometric models show a negative relationship between central bank independence and inflation in both developed and developing countries

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References

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