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State-Contingent Inflation Contracts and Unemployment Persistence

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Author Info

  • Lockwood, Ben

Abstract

This paper shows that, if unemployment (or some other real variable) follows a dynamic autoregressive process, the government can still achieve its precommitment outcome in monetary policy by offering the central banker a linear inflation contract, where the penalty for incremental inflation depends positively on lagged unemployment. This note, therefore, offers an extension of recent results of C. Walsh (1995) to the case of persistence in real economic variables such as output or unemployment. Copyright 1997 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 29 (1997)
Issue (Month): 3 (August)
Pages: 286-99

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Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:3:p:286-99

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Hans Gersbach & Verena Liessem, 2008. "Reelection threshold contracts in politics," Social Choice and Welfare, Springer, vol. 31(2), pages 233-255, August.
  2. Castrén, Olli & Takalo , Tuomas & Wood , Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Research Discussion Papers 22/2004, Bank of Finland.
  3. Mash, Richard, 2002. "Monetary Policy with an Endogenous Capital Stock When Inflation Is Persistent," Manchester School, University of Manchester, vol. 70(0), pages 55-86, Supplemen.
  4. Leitemo,K., 1999. "Inflation targeting strategies in small open economies," Memorandum 21/1999, Oslo University, Department of Economics.
  5. repec:oxf:wpaper:015 is not listed on IDEAS
  6. Anssi Rantala, 2004. "Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence," GE, Growth, Math methods 0404005, EconWPA.
  7. Henrik Jensen & Roel M. W. J. Beetsma, 1999. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts: Comment," American Economic Review, American Economic Association, vol. 89(1), pages 342-347, March.
  8. Diana N. Weymark, 2001. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0102, Vanderbilt University Department of Economics.
  9. Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.
  10. Gauti B. Eggertsson & Eric Le Borgne, 2003. "A Political Agency Theory of Central Bank Independence," IMF Working Papers 03/144, International Monetary Fund.
  11. Edward Kutsoati, 2000. "Debt-Contingent Inflation Contracts and Targeting," Discussion Papers Series, Department of Economics, Tufts University 0009, Department of Economics, Tufts University.
  12. Hans Gersbach, 2004. "Competition of Politicians for Incentive Contracts and Elections," Public Choice, Springer, vol. 121(1), pages 157-177, October.
  13. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0502, Vanderbilt University Department of Economics.
  14. Florin Bilbiie, 2005. "Deus ex machina wanted: time inconsistency of time consistency solutions in monetary policy," Economics Papers 2005-W10, Economics Group, Nuffield College, University of Oxford.
  15. Rantala, Anssi, 2003. "Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence," Research Discussion Papers 30/2003, Bank of Finland.

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