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Institutional Arrangements for Monetary Policy When Output Is Persistent

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  • Roisland, Oistein

Abstract

A discretionary monetary policy gives rise to a constant average inflation bias, a state-contingent inflation bias, and a stabilization bias when output is persistent. The paper considers institutional arrangements ("contracts") for central banks that remove these policy imperfections. The average and state-contingent inflation biases can be removed by directing the central bank to target the growth of nominal income and appoint a central banker with a specific relative weight attached to output stabilization. An alternative to this institutional solution is to direct central banks to aim for a feasible output target. Although this would remove the inflationary biases, the government must appoint a "liberal" (as opposed to "conservative") central banker in order to implement optimal stabilization.

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Bibliographic Info

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

Volume (Year): 33 (2001)
Issue (Month): 4 (November)
Pages: 994-1014

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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:4:p:994-1014

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

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Cited by:
  1. Ronald A. Ratti & Sang-Kun Bae, 2004. "Conservative Central Banks, and Nominal Growth, Exchange Rate and Inflation Targets," Working Papers 0423, Department of Economics, University of Missouri, revised 15 Oct 2006.

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