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Inflation Band Targeting and Optimal Inflation Contracts

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  • Frederic S. Mishkin
  • Niklas J. Westelius

Abstract

In this paper we examine how target ranges work in the context of a Barro-Gordon (1983) type model, in which the time-inconsistency problem stems from political pressures from the government. We show that target ranges turn out to be an excellent way to cope with the time-inconsistency problem, and achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12384.

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Date of creation: Jul 2006
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Publication status: published as Frederic S. Mishkin & Niklas J. Westelius, 2008. "Inflation Band Targeting and Optimal Inflation Contracts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 557-582, 06.
Handle: RePEc:nbr:nberwo:12384

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  1. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2005. "The Optimal Degree of Discretion in Monetary Policy," Econometrica, Econometric Society, vol. 73(5), pages 1431-1475, 09.
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  6. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  7. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
  8. Robert Amano & Richard Black & Marcel Kasumovich, 1997. "A Band-Aid Solution to Inflation Targeting," Working Papers 97-11, Bank of Canada.
  9. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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Cited by:
  1. de Mello Luiz & Moccero Diego & Mogliani Matteo, 2013. "Do Latin American Central Bankers Behave Non-Linearly? The Experiences of Brazil, Chile, Colombia and Mexico," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(2), pages 141-165, April.
  2. Frederic S. Mishkin, 2005. "How Big a Problem is Too Big to Fail?," NBER Working Papers 11814, National Bureau of Economic Research, Inc.
  3. Roc Armenter & Martin Bodenstein, 2006. "Of nutters and doves," International Finance Discussion Papers 885, Board of Governors of the Federal Reserve System (U.S.).
  4. Frederic S. Mishkin, 2006. "How Big a Problem is Too Big to Fail? A Review of Gary Stern and Ron Feldman's Too Big to Fail: The Hazards of Bank Bailouts," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 988-1004, December.
  5. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
  6. Alberto Locarno, 2006. "Imperfect knowledge, adaptive learning and the bias against activist monetary policies," Temi di discussione (Economic working papers) 590, Bank of Italy, Economic Research and International Relations Area.
  7. Beechey, Meredith & Österholm, Pär, 2008. "Revisiting the uncertain unit root in GDP and CPI: Testing for non-linear trend reversion," Economics Letters, Elsevier, vol. 100(2), pages 221-223, August.
  8. Toshitaka Sekine & Yuki Teranishi, 2008. "Inflation Targeting and Monetary Policy Activism," IMES Discussion Paper Series 08-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  9. Niklas J. Westelius, 2008. "Inflation Range Targets with Hard Edges," Economics Working Paper Archive at Hunter College 423, Hunter College Department of Economics.
  10. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
  11. Meredith Beechey, 2006. "A closer look at the sensitivity puzzle: the sensitivity of expected future short rates and term premia to macroeconomic news," Finance and Economics Discussion Series 2007-06, Board of Governors of the Federal Reserve System (U.S.).
  12. Alexander Bick & Dieter Nautz, 2008. "Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 61-76, September.
  13. Alpanda, Sami & Honig, Adam, 2007. "Political Monetary Cycles and a New de facto Ranking of Central Bank Independence," MPRA Paper 5898, University Library of Munich, Germany.
  14. William Whitesell, 2005. "An inflation goal with multiple reference measures," Finance and Economics Discussion Series 2005-62, Board of Governors of the Federal Reserve System (U.S.).
  15. Canuto, Otaviano & Cavallari, Matheus, 2013. "Monetary policy and macroprudential regulation : whither emerging markets," Policy Research Working Paper Series 6310, The World Bank.

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