Discretion and the transmission lags of monetary policy
AbstractMonetary policy transmission lags create credibility problems for the inflation-targeting policy maker who acts under discretion. We show that if prices react to monetary policy with a longer lag than output, the welfare maximizing inflationtargeting policy implies no policy stabilization of cost-push shocks in the canonical New Keynesian model. The reason is simple: for the period monetary policy influences output, inflation is predetermined and the best discretionary policy is to stabilize the output gap fully. We find that money growth targeting comes close to replicating the welfare-maximizing policy under commitment if there are transmission lags.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 8/2007.
Length: 27 pages
Date of creation: 15 Aug 2007
Date of revision:
discretionary and stabilization bias; monetary policy; transmission lags; inflation targeting; money targeting;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-09 (All new papers)
- NEP-CBA-2007-09-09 (Central Banking)
- NEP-MAC-2007-09-09 (Macroeconomics)
- NEP-MON-2007-09-09 (Monetary Economics)
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- Leitemo, Kai, 2008. "Inflation-targeting rules: History-dependent or forward-looking?," Economics Letters, Elsevier, vol. 100(2), pages 267-270, August.
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