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Central Bank Reputation in a Forward-Looking Model

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  • Loisel, O.

Abstract

This paper examines whether reputation concerns can induce the central bank to implement the time-inconsistent optimal monetary policy in a standard New Keynesian model. The forward-looking nature of this model is in this respect interesting on two accounts: first, it worsens the time-inconsistency problem of optimal monetary policy by adding a stabilization bias to the possible inflation bias; second, it enables us to model more satisfactorily the reputation of the central bank by accounting for the coordination of the private agents on the punishment length. Our results suggest that the inflation bias and the stabilization bias can be overcome for the calibrations used in the literature. These results enable us to endogenize Woodford's timeless perspective and weaken the case for monetary policy delegation.

Suggested Citation

  • Loisel, O., 2005. "Central Bank Reputation in a Forward-Looking Model," Working papers 127, Banque de France.
  • Handle: RePEc:bfr:banfra:127
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    Cited by:

    1. Barthélemy, Jean & Mengus, Eric, 2018. "The signaling effect of raising inflation," Journal of Economic Theory, Elsevier, vol. 178(C), pages 488-516.
    2. Taisuke Nakata, 2018. "Reputation and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 252-268, April.
    3. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    4. Kurozumi, Takushi, 2008. "Optimal sustainable monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1277-1289, October.
    5. repec:hal:spmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    6. Ippei Fujiwara & Timothy Kam & Takeki Sunakawa, 2016. "A note on imperfect credibility," CAMA Working Papers 2016-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Taisuke Nakata, 2014. "Reputation and Liquidity Traps," Working Papers e087, Tokyo Center for Economic Research.
    8. Volker Hahn, 2021. "Discretionary policy and multiple equilibria in a new Keynesian model," Oxford Economic Papers, Oxford University Press, vol. 73(1), pages 423-445.
    9. Batista, Quentin & Nakata, Taisuke & Sunakawa, Takeki, 2023. "Credible Forward Guidance," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    10. Taisuke Nakata, 2018. "Reputation and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 252-268, April.
    11. Taisuke Nakata & Takeki Sunakawa, 2019. "Credible Forward Guidance," Finance and Economics Discussion Series 2019-037, Board of Governors of the Federal Reserve System (U.S.).
    12. Yang Lu & Ernesto Pasten & Robert King, 2013. "Policy design with private sector skepticism in the textbook New Keynesian model," 2013 Meeting Papers 241, Society for Economic Dynamics.
    13. repec:hal:wpspec:info:hdl:2441/713kqq1pgu80lr8fn0lsuuh8lf is not listed on IDEAS
    14. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Sciences Po publications 2017-01, Sciences Po.
    15. Clerc, Laurent & Dellas, Harris & Loisel, Olivier, 2011. "To be or not to be in monetary union: A synthesis," Journal of International Economics, Elsevier, vol. 83(2), pages 154-167, March.
    16. repec:hal:spmain:info:hdl:2441/713kqq1pgu80lr8fn0lsuuh8lf is not listed on IDEAS
    17. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    18. Sunakawa, Takeki, 2015. "A quantitative analysis of optimal sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 119-135.
    19. Fujiwara, Ippei & Kam, Timothy & Sunakawa, Takeki, 2019. "On two notions of imperfect credibility in optimal monetary policies," Economics Letters, Elsevier, vol. 174(C), pages 22-25.

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    More about this item

    Keywords

    Commitment ; Discretion ; Inflation bias ; Reputation ; Stabilization bias ; Timeless perspective.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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