Monetary Policymaking As An Optimization Exercise

Abstract

Monetary policymaking can be seen as an optimization exercise to be performed by central banks. In practice, central banks can be classified according to the monetary mandate assigned to them, mainly a single or a dual mandate. Among independent central banks, a majority are single-objective targeters, while the minority exercise a dual mandate. The main argument against adopting a double mandate is an apparent inconsistency between objectives and instruments and also about a potential risk for monetary independence. This paper illustrates how both mandates can be defined as an optimization problem. The dual mandate, far from being inconsistent or a threat to monetary independence, is more effective for improving social well-being since it represents the maximization of growth subject to the minimum of inflation.