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Signalling and Commitment: Monetary versus Inflation Targeting

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Author Info
Gersbach, Hans
Hahn, Volker

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Abstract

This Paper compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and, because of verifiability problems, the transparency solution is not feasible. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4151.

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Date of creation: Dec 2003
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Handle: RePEc:cpr:ceprdp:4151

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Keywords: central banks commitment inflation targeting monetary targeting signalling

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Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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

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  11. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December. [Downloadable!] (restricted)
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  16. Garfinkel, Michelle R & Oh, Seonghwan, 1993. "Strategic Discipline in Monetary Policy with Private Information: Optimal Targeting Horizons," American Economic Review, American Economic Association, vol. 83(1), pages 99-117, March.
  17. repec:fth:baesse:9425 is not listed on IDEAS
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  19. Helge Berger & Marcel Thum, 2000. "News Management in Monetary Policy: When Central Banks Should Talk to the Government," German Economic Review, Blackwell Publishing, vol. 1(4), pages 465-493, November. [Downloadable!] (restricted)
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  21. Charles Goodhart & José Viñals, 1994. "Strategy and Tactics of Monetary Policy: Examples from Europe and the Antipodes," Banco de España Working Papers 9425, Banco de España.
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  24. Ricardo Reis, 2003. "Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target," Advances in Macroeconomics, Berkeley Electronic Press, vol. 3(1), pages 1118-1118. [Downloadable!] (restricted)
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  1. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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