Last week, the National Bank of Ukraine (NBU) was honored to host Dr. Jesper Lindé, Head of Research Division at Sveriges Riksbank (the central bank of Sweden). Dr. Lindé spent two days advising NBU’s experts on issues related to monetary policy and research activities. In addition, Dr. Lindé gave an open research seminar where he presented his ongoing work titled “Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense?” jointly authored with Davide Debortoli, Jinill Kim, and Ricardo Nunes.
In their work, the authors contribute to current discussions about central banks’ mandate. Namely, how should the mandate be designed in order for central banks to maximize social welfare for its citizens? Should central banks only focus on price stability? Or should they also take into account output stability, similar to how monetary policy is implemented in the US Federal Reserve System?
The authors have designed − within a standard new Keynesian framework where price- and wage rigidities are important features − a simple loss function in which price- and output stability are the main objectives of a central bank. The model is adapted to the main features of the US economy and the obtained results suggest that a higher weight on output stability, in their study the output gap, than earlier studies have recommended may be warranted. According to the authors, this will improve social welfare, while emphasizing benefits from a dual mandate similar to that of the US Federal Reserve, which stipulates the promotion of maximum employment while maintaining price stability.
The presentation of Dr. Lindé initiated an interesting discussion among the seminar’s participants. The questions addressed to Dr. Lindé were related to emerging and small open economies, and Ukraine in particular. The presenter emphasized that the results of the research paper are robust for advanced and closed economies. While for the case of countries like Ukraine, which have historically experienced high and volatile rates of inflation and recently adopted flexible inflation targeting regime, the major objective of the central bank should lie in achieving stable and low inflation and improving the central bank’s credibility. Successful experience of other countries suggests that it will result in anchoring inflation expectations and overall macroeconomic stabilization, which, in turn, will provide the prerequisites for a dual mandate.
The video of the seminar is available at the following link.
We invite potential contributors to participate in the upcoming seminars and present the findings of their research studies. To this end, please send your submissions (presentation materials and/or an article, CV, with an indication of a suitable date for the seminar to take place) to the Research Division of the Monetary Policy and Economic Analysis Department for consideration via e-mail to: [email protected].