Tinbergen Rule

Counting targets and instruments

Tinbergen (1952, 1956) treated the economy as a system of simultaneous equations and formalized policy as a problem in which authorities fix desired values of target variables, such as full employment or balance of payments equilibrium, and solve for instrument variables such as interest rates, government spending and the exchange rate. Just as a system of equations has a solution only when the number of unknowns is at least the number of equations, hitting n independent targets exactly requires n independent instruments. With too few instruments, trade-offs between targets are unavoidable; with more, there are extra degrees of freedom. The problem of attaining internal and external balance together, analyzed by Meade (1951) and Swan (1955), is a classic example.

The assignment principle and optimization

Mundell (1962) proposed the principle of effective market classification: each instrument should be assigned to the target on which it has the greatest relative effect. Under fixed exchange rates, monetary policy should be assigned to external balance and fiscal policy to internal balance for stable convergence, a conclusion that, with the Mundell–Fleming model, became a foundation of open-economy policy analysis. Theil (1956) proposed minimizing a loss function over deviations from targets rather than hitting them exactly. Brainard (1967) showed that uncertainty about instrument effects calls for using instruments less aggressively, and Poole (1970) analyzed when an interest rate or the money supply is the better instrument depending on the nature of shocks.

Modern applications and debates

Hughes Hallett (1989) reassessed the contributions of Tinbergen and Theil from the standpoint of econometric policy analysis, and Acocella, Di Bartolomeo and Hughes Hallett (2013) extended the theory to settings in which several policy authorities and private agents interact strategically. After the 2008 financial crisis, Blanchard, Dell'Ariccia and Mauro (2010) argued that monetary policy aimed only at price stability could not also secure financial stability, emphasizing additional tools such as macroprudential instruments. Svensson (2012) invoked the Tinbergen rule to argue that interest rates should be assigned to price stability and macroprudential policy to financial stability, and Knot (2014) discussed the governance of macroprudential policy. The principle also connects with debates on policy constraints such as the impossible trinity.

FAQ

What is the Tinbergen rule in simple terms?

To hit two goals at once you need at least two independent tools. If you try to reach both goals with one tool, you will usually miss one of them.

How does it differ from Mundell's assignment principle?

The Tinbergen rule concerns how many instruments are needed, while Mundell's assignment principle concerns which target each instrument should be assigned to.

Sources reviewed: 2026-10-26

References

1. Tinbergen, J. (1952). On the Theory of Economic Policy. Amsterdam: North-Holland.
2. Tinbergen, J. (1956). Economic Policy: Principles and Design. Amsterdam: North-Holland.
3. Mundell, R. A. (1962). The appropriate use of monetary and fiscal policy for internal and external stability. IMF Staff Papers, 9(1), 70–79.
4. Meade, J. E. (1951). The Theory of International Economic Policy, Vol. 1: The Balance of Payments. London: Oxford University Press.
5. Swan, T. W. (1955). Longer-run problems of the balance of payments. In H. W. Arndt & W. M. Corden (Eds.), The Australian Economy: A Volume of Readings (pp. 384–395). Melbourne: Cheshire.
6. Theil, H. (1956). On the theory of economic policy. American Economic Review, 46(2), 360–366.
7. Brainard, W. C. (1967). Uncertainty and the effectiveness of policy. American Economic Review, 57(2), 411–425.
8. Poole, W. (1970). Optimal choice of monetary policy instruments in a simple stochastic macro model. Quarterly Journal of Economics, 84(2), 197–216.
9. Hughes Hallett, A. J. (1989). Econometrics and the theory of economic policy: The Tinbergen–Theil contributions 40 years on. Oxford Economic Papers, 41(1), 189–214.
10. Acocella, N., Di Bartolomeo, G., & Hughes Hallett, A. (2013). The Theory of Economic Policy in a Strategic Context. Cambridge: Cambridge University Press.
11. Svensson, L. E. O. (2012). Comment on Michael Woodford, "Inflation targeting and financial stability". Sveriges Riksbank Economic Review, 2012(1), 33–39.
12. Blanchard, O., Dell'Ariccia, G., & Mauro, P. (2010). Rethinking macroeconomic policy. Journal of Money, Credit and Banking, 42(s1), 199–215.
13. Knot, K. (2014). Governance of macroprudential policy. Banque de France Financial Stability Review, 18, 25–32.