Endogenous Monetary Policy in Macroeconomic Models: The Role of Commitment, Conservative Central Banker and Optimal Central Bank Contracts in the Credibility of Monetary Policy
This study focuses on the motives and constraints of the monetary policy authorities, i.e. the central banks. The fundamental theme is that the policy variable (inflation) is endogenous in the analysis. The behavior of this variable is a consequence of strategic and informational interactions between policymakers and private sector individuals and institutions. It is our aim to integrate old and new contributions of endogenous monetary policy models in a common framework. We will show how in the optimal central bank contract a linear cost of inflation is added to the central bank's loss function. This type of a contract is a perfect substitute for commitments. It enables the policymaker to precommit policy; it makes her policy announcement credible. We will also show that participation in a monetary union is beneficial for an inflation prone country with relatively small output variation. In that case expected gains from less inflation outweigh expected costs from less stabilization the monetary union is assumed to provide. In addition, it will be shown that the bigger the output variation of a country when the country's output is negatively correlated with the monetary union output, the more conservative (more weight on inflation than output stabilization) a central bank governor should be nominated in the country. This is because the more negative the output correlation is, the less weight the country prefers the monetary union to put on output stabilization. Each member country of the Economic and Monetary Union (EMU) can affect the monetary policy pursued by the EMU through its central bank governor.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Government Institute for Economic Research Finland (VATT) in its series Research Reports with number
36.
Length: Date of creation: 01 Jan 1996 Date of revision: Handle: RePEc:fer:resrep:36
Contact details of provider: Postal: Arkadiankatu 7, P.O. Box 1279, FI-00101 Helsinki Phone: +358 40 304 5500 Fax: +358 9 4780 2929 Email: Web page: http://www.vatt.fi/ More information through EDIRC
Order Information: Email:
For technical questions regarding this item, or to correct its listing, contact: (Anita Niskanen).
Find related papers by JEL classification: E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General F00 - International Economics - - General - - - General