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Discretion and the transmission lags of monetary policy

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Author Info

  • Kilponen, Juha

    ()
    (Bank of Finland Research)

  • Leitemo, Kai

    ()
    (Norwegian School of Management (BI))

Abstract

Monetary 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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0708netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2007.

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Length: 27 pages
Date of creation: 15 Aug 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_008

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: discretionary and stabilization bias; monetary policy; transmission lags; inflation targeting; money targeting;

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Cited by:
  1. 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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