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Inflation Targeting as a Way of Precommitment

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  • Herrendorf, Berthold

Abstract

This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. The author argues that since this arrangement is transparent, it solves M. B. Canzoneri's private information problem, ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy. Copyright 1998 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 50 (1998)
Issue (Month): 3 (July)
Pages: 431-48

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Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:431-48

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  1. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 201-06, May.
  2. Herrendorf, Berthold & Lockwood, Ben, 1996. "Rogoff's Conservative Central Banker Restored," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 450, University of Warwick, Department of Economics.
  3. Minford, Patrick, 1993. "Time-inconsistency, Democracy and Optimal Contingent Rules," CEPR Discussion Papers, C.E.P.R. Discussion Papers 767, C.E.P.R. Discussion Papers.
  4. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
  5. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  6. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061414, December.
  7. Garfinkel, Michelle R & Oh, Seonghwan, 1993. "Strategic Discipline in Monetary Policy with Private Information: Optimal Targeting Horizons," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 99-117, March.
  8. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
  9. al-Nowaihi, Ali & Levine, Paul, 1994. "Can reputation resolve the monetary policy credibility problem?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(2), pages 355-380, April.
  10. Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 35(2), pages 378-93, April.
  11. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, Oxford University Press, vol. 44(3), pages 513-30, July.
  12. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1056-70, December.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  14. Walsh, Carl E, 1995. "Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 1179-91, November.
  15. Driffill, John & Schultz, Christian, 1992. "Wage Setting and Stabilization Policy in a Game with Renegotiation," Oxford Economic Papers, Oxford University Press, Oxford University Press, vol. 44(3), pages 440-59, July.
  16. Al-Nowaihi, A & Levine, Paul L, 1996. "Independent but Accountable: Walsh Contracts and the Credibility Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1387, C.E.P.R. Discussion Papers.
  17. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
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Cited by:
  1. Rotondi, Zeno, 2000. "Credibility of optimal monetary delegation: do we really need prohibitive reappointment costs?," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 0003, Economics Division, School of Social Sciences, University of Southampton.
  2. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 95, Money Macro and Finance Research Group.
  3. Zeno Rotondi & John Driffill, 2003. "Delegation of Monetary Policy: More than a Relocation of the Time-Inconsistency Problem," Computing in Economics and Finance 2003, Society for Computational Economics 292, Society for Computational Economics.
  4. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 49(1), pages 31-50, October.
  5. Gartner, Manfred, 2000. " Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 14(5), pages 527-61, December.
  6. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, Springer, vol. 13(4), pages 341-362, October.
  7. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Analysis Research Group Working Papers, Henley Business School, Reading University earg-wp2007-13, Henley Business School, Reading University.
  8. Mihailov, Alexander & Ullrich, Katrin, 2007. "Independence and Accountability of Monetary and Fiscal Policy Committees," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 07-044, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. M. Lossani & P. Natale, & P. Tirelli, 1997. "Fiscal Policy and Imperfectly Credible Inflation Targets: Should We Appoint Expenditure-Conservative Central Bankers?," Working Papers, Business School - Economics, University of Glasgow 9707, Business School - Economics, University of Glasgow.
  10. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS

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