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A Comparison of Three Institutions for Monetary Policy When Central Bankers Have Private Objectives

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  • Gruner, Hans Peter
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    Abstract

    How do different institutional arrangements for the central bank perform when central bankers have private objectives and society's objectives vary with time? This paper evaluates three benchmark monetary institutions from a constitutional perspective: (i) a contract with an inflation- or monetary target announcement; (ii) an inflation rule, and (iii) the laissez faire policy, i.e., the absence of any contractual arrangement. At the stage of institutional choice there is uncertainty about both society's mean inflation target and the central banker's future inflation target. A target announcement reveals the type of the central banker and solves the credibility vs. flexibility trade-off but it can not prevent that the central banker follows private objectives. The announcement-based contract is the optimal institution if (i) the initial uncertainty about the central banker's objectives is small and (ii) if unemployment is sufficiently high. Copyright 1997 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Public Choice.

    Volume (Year): 92 (1997)
    Issue (Month): 1-2 (July)
    Pages: 127-43

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    Handle: RePEc:kap:pubcho:v:92:y:1997:i:1-2:p:127-43

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    1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    2. Grilli, Vittorio, 1989. "Exchange rates and seigniorage," European Economic Review, Elsevier, vol. 33(2-3), pages 580-587, March.
    3. Fratianni, Michele & von Hagen, Jürgen & Waller, Christopher, 1993. "Central Banking as a Political Principal-Agent Problem," CEPR Discussion Papers 752, C.E.P.R. Discussion Papers.
    4. Andreas Fischer, 1993. "Inflation Targeting: The New Zealand and Canadian Cases," Cato Journal, Cato Journal, Cato Institute, vol. 13(1), pages 1-27, Spring/Su.
    5. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
    6. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    7. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
    8. Hans Grüner & Carsten Hefeker, 1996. "Bank cooperation and banking policy in a monetary union: A political-economy perspective on EMU," Open Economies Review, Springer, vol. 7(3), pages 183-198, July.
    9. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
    10. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December.
    11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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