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What is the Central Banks Game?

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  • Charles Goodhart

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  • Haizhou Huang

Abstract

In this papaer we, first, by explicitly taking account of the private sectors influence and pressure on the monetary authorities, provide a more plausible representation of the motivations of the two main players. We then incorporate persistence into the model and show that the optimal policy of the authorities will be state dependent. Finally and most importantly, we highlight an inconsistency between two strands in the literature of monetary analysis, namely the long lags of monetary policy and the time inconsistency. Such a lag of monetary policy means that the policy will be transparently observed before it affects the economy, consequently the Central Bank cannot fool anybody who has not already bound herself into a contract longer than the lag. Even if such contracts are pervasive, the inflationary bias arising from time inconsistency much be must smaller than previously assessed.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp222.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp222.

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Date of creation: Nov 1995
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Handle: RePEc:fmg:fmgdps:dp222

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Web page: http://www.lse.ac.uk/fmg/

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Cited by:
  1. Sousa, Pedro A. B. de, 2001. "Independent and Accountable Central Banks and the European Central Bank," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 5, 07.
  2. R. Rovelli & M. Polo & H. Gottinger & D. Encaoua & M. Galeotti & W. Lachmann & S. Bremer, 1997. "Book reviews," Journal of Economics, Springer, vol. 65(1), pages 103-121, February.
  3. Haizhou Huang & Peter B Clark & Charles Goodhart, 1996. "Optimal Monetary Policy Rules in a Rational Expectations Model of the Phillips Curve," FMG Discussion Papers dp247, Financial Markets Group.
  4. Runchana Pongsaparn, 2005. "The Theory of Monetary Policy: A Review," Working Papers 2005-08, Economic Research Department, Bank of Thailand.
  5. Remsperger, Hermann & Worms, Andreas, 1999. "Transparency in monetary policy," CFS Working Paper Series 1999/16, Center for Financial Studies (CFS).

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