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Establishing a reputation for dependability by means of inflation targets

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  • Alex Cukierman

Abstract

This paper develops a simple intertemporal model of inflation targets within a framework in which the public is uncertain about the dependability of policymakers, and in which policymakers do not perfectly control inflation. The framework is used to evaluate the effects of various parameters like the rate of time preference, initial reputation, and transparency (or precision of inflation control) on planned inflation, announced targets and the evolution of reputation and of inflationary expectations. The paper also shows that, when allowed to choose the precision of inflation control, more dependable policymakers will often choose relatively more precise control procedures. Implications for the type of inflation stabilization (cold turkey or gradual) chosen by dependable policymakers are also derived. Copyright Springer-Verlag Berlin Heidelberg 2000

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Bibliographic Info

Article provided by Springer in its journal Economics of Governance.

Volume (Year): 1 (2000)
Issue (Month): 1 (03)
Pages: 53-76

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Handle: RePEc:spr:ecogov:v:1:y:2000:i:1:p:53-76

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Related research

Keywords: Key words:Inflation targets; establishing credibility; precision of inflation control; JEL classification:E5; E63;

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References

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  1. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  2. Cukierman, A. & Liviatan, N., 1989. "Optimal Accommodation By Strong Policymakers Under Incomplete Information," Papers 13-89, Tel Aviv.
  3. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
  4. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
  5. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  6. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  7. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
  8. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  9. Cukierman, A. & Liviatan, N., 1991. "The Dynamics of Optimal Gradual Stabilizations," Papers 34-91, Tel Aviv.
  10. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1, July.
  11. Michael Bruno & Guido Di Tella & Rudiger Dornbusch & Stanley Fischer, 1988. "Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022796, December.
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Cited by:
  1. Baaziz, Yosra & Labidi, Moez & Lahiani, Amine, 2013. "Does the South African Reserve Bank follow a nonlinear interest rate reaction function?," Economic Modelling, Elsevier, vol. 35(C), pages 272-282.
  2. Laubach, Thomas, 2003. "Signalling commitment with monetary and inflation targets," European Economic Review, Elsevier, vol. 47(6), pages 985-1009, December.

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