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Can Opacity of a Credible Central Bank Explain Excessive Inflation?

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  • Baeriswyl, Romain
  • Cornand, Camille

Abstract

Excessive inflation is usually attributed to the lack of central bank’s credibility. In this context, most of the literature considers transparency a means to establish central bank’s credibility. The contribution of this paper is twofold. First, it shows that, even in the absence of inflationary bias, a credible central bank may find it optimal to implement an accommodating monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap, and thereby whether it will implement an expansionary or contractionary policy in response to cost-push shocks. Second, it stresses that transparency is not just a means to achieve credibility but is essential per se for the optimality of monetary policy of a fully credible central bank.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 1376.

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Date of creation: Feb 2007
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Handle: RePEc:lmu:muenec:1376

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Keywords: monetary policy; differential information; transparency; cost-push shocks;

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  1. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
  2. Bennett T. McCallum, 1996. "Crucial Issues Concerning Central Bank Independence," NBER Working Papers 5597, National Bureau of Economic Research, Inc.
  3. Adam, Klaus, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 0223, European Central Bank.
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  5. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A price target for U.S. monetary policy? Lessons from the experience with money growth targets," Working Paper Series, Macroeconomic Issues WP-96-14, Federal Reserve Bank of Chicago.
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  7. Selva Demiralp & Oscar Jorda, . "The Announcement Effect: Evidence from Open Market Desk Data," Department of Economics 01-04, California Davis - Department of Economics.
  8. Marvin Goodfriend & Robert G. King, 2005. "The Incredible Volcker Disinflation," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-007, Boston University - Department of Economics.
  9. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  10. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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  12. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  13. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  14. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  15. Orphanides, Athanasios, 2005. "Comment on: "The incredible Volcker disinflation"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1017-1023, July.
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Cited by:
  1. David P. Myatt & Chris Wallace, 2008. "On the Sources and Value of Information: Public Announcements and Macroeconomic Performance," Economics Series Working Papers 411, University of Oxford, Department of Economics.
  2. Camille Cornand & Romain Baeriswyl, 2006. "Monetary Policy and its Informative Value," FMG Discussion Papers dp569, Financial Markets Group.
  3. Luca Colombo & Gianluca Femminis & Alessandro Pavan, 2012. "Information Acquisition and Welfare," Discussion Papers 1554, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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