TOWARDS MORE EFFECTIVE MONETARY POLICY Proceedings of International Conferences organized by the Institute for Monetary and Economic Studies, Bank of Japan MONETARY POLICY IN OUR TIMES, Ando, Eguchi, Farmer, and Suzuki, eds, MIT Press, 1985 FINANCIAL INNOVATION AND MONETARY POLICY, Suzuki and Yomo, eds, University of Tokyo Press, 1986 TOWARD A WORLD OF ECONOMIC STABILITY, Suzuki and Okabe, eds, University of Tokyo Press, 1988 THE EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM, Suzuki, Okabe, and Miyake, eds, University of Tokyo Press, 1990 PRICE STABILIZATION IN THE I 990s, Shigehara, ed., Macmillan, 1993 FINANCIAL STABILITY IN A CHANGING ENVIRONMENT, Sawamoto, Nakajima, and Taguchi, eds, Macmillan, 1995 Towards More Effective Monetary Policy Edited by Iwao Kuroda Director, Institute for Monetary and Economic Studies Bank ofJ apan in association with Palgrave Macmillan First published in Oreat Britain 1997 by MACMILLAN PRESS LTD Houndmills. Basingstoke. Hampshire R021 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-25384-5 ISBN 978-1-349-25382-1 (eBook) DOI 10.1007/978-1-349-25382-1 First published in the United States of America 1997 by ST. MARTIN'S PRESS, INC .. Scholarly and Reference Division. 175 Fifth Avenue. New York. N.V. 10010 ISBN 978-0-312-16526-0 Library of Congress Cataloging-in-Publication Data Towards more effective monetary policy I edited by Iwao Kuroda. p. cm. Proceedings of the scventh international conference organized and sponsored by the Institute for Monetary and Economic Studies. Bank of Japan. Includes bibliographical references and index. ISBN 978-0-312-16526-0 (cloth) I. Monetary policy-Congresses. 2. Monetary policy-United Slales-Congresses. I. Kuroda. Iwao. 1943- H0230.3.T68 1997 :lJ2.497J-dc20 96-3466:l CIP Selection and editorial maller © Institute for Monetary and Economic Studies. Bank of Japan 1997 Text © Macmillan Press Lld 1997 Softcover reprint of the hardcover Ist edition 1997 All rights reserved. No reproduction. copy or transmission of this publication may be made without wrillen permission. No paragraph of this publication may be reproduced. copied or transmilled save with wrillen permission or in accordance wilh the provisions of the Copyright. Designs and Patents Act 1988. or under the terms of any licence permilling limited copying issued by the Copyright Licensing Agency. 90 TOllenham Court Road. London W I P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright. Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 3 2 06 05 04 03 02 01 00 99 Contents Preface vii List of Participants viii Opening Remarks: Yasuo Matsushita xiii PART I KEYNOTE SPEECHES On Making Monetary Policy More Effective Domestically and Internationally 3 Allan H. Meltzer 2 Policy Rules as a Means to a More Effective Monetary Policy 28 John B. Taylor 3 Styles of Monetary Management 40 Tommaso Padoa-Schioppa PART II EXPLORATION OF A FRAMEWORK FOR EFFECTIVE MONETARY POLICY 4 Inflation Control and Monetary Policy Rules 67 David Laidler Comments: Michael Mussa 94 5 Challenges for Monetary Policy in the Evolving Financial Environment 99 David W. Mullins. Jr Comments: Michael H. Moskow 130 PART III EXPERIENCE WITH MONETARY POLICY GUIDELINES 6 The Rise and Fall of Money Growth Targets as Guidelines for US Monetary Policy 137 Benjamin M. Friedman Comments: David Longworth 165 Georg Rich 171 7 Monetary Targeting in Germany 176 Manfred J.M. Neumann v vi Contents Comments: William R. White 199 Jerry L Jordan 206 8 Inflation Targeting in Canada, New Zealand, Sweden, the United Kingdom, and in General 211 Bennett T. McCallum Comments: David Mayes 242 Jack H. Beebe 249 9 Japanese Monetary Policy. Rules or Discretion? A Reconsideration 253 Kazuo Ueda Comments: Frederic S. Mishkin 280 Krister Andersson 285 Marvin Goodfriend 289 PART IV CENTRAL BANK INDEPENDENCE AND ACCOUNTABILITY 10 Independence and Accountability 299 Clive Briault, Andrew Haldane and Mervyn King Comments: Robert Reynders 327 Donald L. Kohn 330 Reiner Kiinig 335 11 Central Bank Independence in the European Union 341 Franco Bruni Comments: Robert Raymond 370 Cathy E. Minehan 374 Clive Briault 379 PART V CONCLUDING SUMMARY 12 Towards More Effective Monetary Policy: Concluding Remarks 389 Guido Tabellini PART VI BACKGROUND PAPER 13 The Policy Objectives and the Optimal Institutional Framework of a Central Bank 403 Kunio Okina Index 427 Preface In a rapidly changing world, no more so than in the financial industry, central bankers are no exception in that they have to keep abreast of an ever expanding array of subjects. Hence, communication, including the exchange of views among central bankers and academia, is of the utmost importance, and it is with this thought in mind that the Bank of Japan's Institute for Monetary and Economic Studies has organized and sponsored a biennial International Conference since 1983. This book contains the proceedings of the Seventh International Confer ence that focused on the theme of "Towards More Effective Monetary Pol icy," and which was held on 26-27 October 1995. The conference explored the operational and institutional framework for effective monetary policy implementation against the background of recent developments in eco nomics and central banking practice. In planning and organizing the conference, we received invaluable advice from many individuals including Allan H. Meltzer and John B. Taylor, both Honorary Advisers of the Institute. In addition to the authors of the papers which were presented and discussants, many in the Institute also contrib uted; in this context, I would especially like to thank Kunio Okina, Yoshiaki Shikano, Wataru Takahashi, and Michio Kitahara for organizing the con ference, and Miho Yamaguchi for her secretarial support. IWAO KURODA Director Institute for Monetary and Economic Studies vii List of Participants Teresita D. Adamos is Deputy Director, Department of Economic Research, Central Bank of the Philippines. Koos Alders is Assistant Manager, Monetary and Economic Policy Depart ment, De Nederlandsche Bank N.V. Ismail Alowi is Deputy Manager, Economics Department, Bank Negara Malaysia. Krister Andersson is Chief Economist and Director, Economics Depart ment, Sveriges Riksbank. Jack H. Beebe is Senior Vice President and Director of Research, Federal Reserve Bank of San Francisco. Boediono is Managing Director, Bank Indonesia. n. Clive Briault is Head, Monetary Assessment and Strategy Division, Bank of England. Franco Bruni is Professor of International Monetary Economics and Director of Department of Economics, Bocconi University. Bo-Yung Chung is Director, Institute for Monetary and Economic Research, Bank of Korea. Benjamin M. Friedman is William Joseph Maier Professor of Political Economy, Harvard University. Toshihiko Fukui is Senior Deputy Governor, Bank of Japan. Marvin Goodfriend is Senior Vice President and Director of Research, Research Department, Federal Reserve Bank of Richmond. Thomas M. Hoenig is President, Federal Reserve Bank of Kansas City. Jerry L. Jordan is President and Chief Executive Officer, Federal Reserve Bank of Cleveland. viii List of Participants ix Keimei Kaizuka is Professor of Economics, Chuo University. Mervyn A. King is Executive Director and Chief Economist, Bank of England. Linda Koh is Deputy Director, Domestic Money and Capital Markets Division, International Department, Monetary Authority of Singapore. Donald L. Kohn is Director, Division of Monetary Affairs, Board of Governors of the Federal Reserve System. Reiner Konig is Head of Economics Department, Deutsche Bundesbank. Iwao Kuroda is Director, Institute for Monetary and Economic Studies, Bank of Japan. David Laidler is Professor of Economics, University of Western Ontario and C.D. Howe Institute. David Longworth is Chief, Department of Monetary and Financial Ana lysis, Bank of Canada. lan J. Macfarlane is Deputy Governor, Reserve Bank of Australia. Yasuo Matsushita is Governor, Bank of Japan. David Mayes is Chief Manager, Economics Department, Reserve Bank of New Zealand. Bennett T. McCallum is HJ. Heinz Professor of Economics, Carnegie Mellon University and National Bureau of Economic Research. Allan H. Meltzer is University Professor of Political Economy and Public Policy, Carnegie Mellon University, Visiting Scholar, American Enterprise Institute, and Honorary Adviser, Institute for Monetary and Economic Stud ies, Bank of Japan. Cathy E. Minehan is President and Chief Executive Officer, Federal Reserve Bank of Boston.