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Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.

Banks and banking, Central. --- Banker's banks --- Banks, Central --- Central banking --- Central banks --- Banks and banking --- Inflation --- Labor --- Macroeconomics --- Production and Operations Management --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Central Banks and Their Policies --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Macroeconomics: Production --- Price Level --- Deflation --- Wages, Compensation, and Labor Costs: General --- Demand and Supply of Labor: General --- Labour --- income economics --- Output gap --- Wages --- Production growth --- Labor markets --- Production --- Prices --- Economic theory --- Labor market --- United States --- Income economics

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We develop a microfounded New Keynesian model to analyze monetary policy and financial stability issues in open economies with financial fragilities and weakly anchored inflation expectations. We show that foreign exchange intervention (FXI) and capital flow management tools (CFMs) can improve monetary policy tradeoffs under some conditions, including by reducing the need for procyclical tightening in response to capital outflow pressures. Moreover, they can be used in a preemptive way to reduce the risk of a “sudden stop” through curbing a buildup in leverage. While these tools can materially improve welfare, mainly by dampening inefficient fluctuations in risk premia, our analysis also highlights potential limitations, including the possibility that their deployment may forestall needed adjustment in the external balance. Finally, our results also emphasize the power of FXIs to provide domestic stimulus in a liquidity trap.

Macroeconomics --- Economics: General --- Exports and Imports --- Foreign Exchange --- Inflation --- Finance: General --- Quantitative Policy Modeling --- Monetary Policy --- Central Banks and Their Policies --- Open Economy Macroeconomics --- International Investment --- Long-term Capital Movements --- Price Level --- Deflation --- International Financial Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Currency --- Foreign exchange --- Finance --- Sudden stops --- Balance of payments --- Prices --- Currency markets --- Financial markets --- Exchange rates --- Exchange rate devaluation --- Currency crises --- Informal sector --- Economics --- Capital movements --- Foreign exchange market

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This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

Macroeconomics --- Economics: General --- Inflation --- Money and Monetary Policy --- Public Finance --- Banks and Banking --- Price Level --- Deflation --- Monetary Policy --- Central Banks and Their Policies --- Measurement of Economic Growth --- Aggregate Productivity --- Cross-Country Output Convergence --- Interest Rates: Determination, Term Structure, and Effects --- Fiscal Policy --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Public finance & taxation --- Banking --- Economic theory & philosophy --- Prices --- Fiscal stimulus --- Fiscal policy --- Interest rate floor --- Monetary policy --- Public investment spending --- Expenditure --- Central bank policy rate --- Financial services --- Currency crises --- Informal sector --- Economics --- Interest rates --- Public investments --- United States

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This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

United States --- Macroeconomics --- Economics: General --- Inflation --- Money and Monetary Policy --- Public Finance --- Banks and Banking --- Price Level --- Deflation --- Monetary Policy --- Central Banks and Their Policies --- Measurement of Economic Growth --- Aggregate Productivity --- Cross-Country Output Convergence --- Interest Rates: Determination, Term Structure, and Effects --- Fiscal Policy --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Public finance & taxation --- Banking --- Economic theory & philosophy --- Prices --- Fiscal stimulus --- Fiscal policy --- Interest rate floor --- Monetary policy --- Public investment spending --- Expenditure --- Central bank policy rate --- Financial services --- Currency crises --- Informal sector --- Economics --- Interest rates --- Public investments