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Central Bank Objective Functions — Brian Romanchuk

Summary:
One topic of research that keeps popping up is the question of what the central bank objective function should be. In simpler terms, what is the target of the central bank? (At present, most central banks have an inflation target, possibly with secondary objectives.) This is a preoccupation of many "conventional" economists -- those in the neoclassical tradition, as well as those that are somewhat out of the mainstream (e.g., Market Monetarists are pushing for a Nominal Gross Domestic Product Level Target (NGDPLT). If one sticks to the usual Modern Monetary Theory (MMT) story, this is not really a topic of interest. However, even if I take my MMT hat off, I think these discussions are putting the cart before the horse.... All you need to know: "Until model error is taken seriously, the

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One topic of research that keeps popping up is the question of what the central bank objective function should be. In simpler terms, what is the target of the central bank? (At present, most central banks have an inflation target, possibly with secondary objectives.) This is a preoccupation of many "conventional" economists -- those in the neoclassical tradition, as well as those that are somewhat out of the mainstream (e.g., Market Monetarists are pushing for a Nominal Gross Domestic Product Level Target (NGDPLT). If one sticks to the usual Modern Monetary Theory (MMT) story, this is not really a topic of interest. However, even if I take my MMT hat off, I think these discussions are putting the cart before the horse....
All you need to know: "Until model error is taken seriously, the debate about the mathematical definition of the central bank target is very much akin to debating the number of angels that can dance on the head of a pin."

But it's an interesting and informative read if you are at all into this, although it helps to have a basic understanding of mathematical modeling and control theory since this is the basis of Brian's analysis.

While this is not directly relevant to understanding MMT, it is a good simple explanation of why MMT economists reject reliance on monetarism of any sort, that is, using monetary policy to "steer" the economy rather than fiscal policy. It puts the burden on those defending central bank independence based on the ability of the central bank to tune the economy if left free to do so.

Bond Economics
Central Bank Objective Functions
Brian Romanchuk

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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