The Inflation Bias Result Revisited
AbstractThe Kydland-Prescott, Barro-Gordon inflation bias result relies on the presumption that policymakers aim at achieving a level of employment above the normal level. This presumption has been recently questioned by both academics and policymakers on the ground of realism. This note shows that even if policymakers are content with the normal level of employment there is an inflation bias if the following two realistic conditions are satisfied. The central bank is uncertain about the future state of the economy and is more sensitive to policy misses leading to employment below the normal level that to policy misses leading to employment above it. The note also shows that there is reason to believe the bias today is smaller than in the past and discusses the implications of the analysis for the design of legal central bank objectives.
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Bibliographic InfoPaper provided by Tel Aviv in its series Papers with number 38-99.
Length: 19 pages
Date of creation: 1999
Date of revision:
Contact details of provider:
Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.
Web page: http://econ.tau.ac.il/research/foerder.asp
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INFLATION ; DECISION MAKING;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
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