The Dual-Mandate Debate: What Do Central Banks Really Target?

Inflation targeting, a monetary policy framework, is criticized for its narrow mandate of safeguarding price stability only and neglecting other equally important macroeconomic variables. This negligence, according to the critics, might have had a role in the unprecedented, real business-cycle fluctuations observed in the past. Hence, they advocate for mandating central banks with equally emphasizing employment and output growth along with inflation. Theoretical claims aside, the literature does not present any empirical evidence on how to determine whether a central bank adheres to a single or a dual mandate. This study is aimed at filling this gap by analyzing the reaction functions of various central banks, including the ones targeting inflation and the ones with no specific targets. Using the panel data from OECD countries, our findings question the prevalent theoretical misunderstanding in the literature: the central banks with no specific targets (the dual-mandate monetary policy regimes) appear to be targeting the rate of inflation only, whereas the central banks that are thought to have a single-mandate seem to be targeting inflation, output growth, and unemployment. These results are significant, both statistically and economically, and question the baseless criticism of the inflation-targeting regime for neglecting employment and output growth.