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Inflation Inertia and Optimal Delegation of Monetary Policy

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  • Keiichi Morimoto

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    (Graduate School of Economics, Osaka University)

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    Abstract

    This paper analyzes the relationship between the optimal weight on output gap in the central bankfs loss function and the degree of inertia in a hybrid version of New Keynesian model with a pure discretionary inflation targeting. I present the policy recommendations as to the weight on output gap in the presence of endogenous persistence in inflation dynamics. Especially, I show that under endogenous persistence of inflation dynamics, even in discretionary monetary policy regime, a Rogofffs (1985) conservative central banker does not necessarily improve social welfare.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0905.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-05.

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    Length: 14 pages
    Date of creation: Feb 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0905

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: hybrid New Keynesian model; inflation targeting; policy weight;

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    1. Jordi Galí & Mark Gertler & J. David López-Salido, 2001. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Working Papers 44, Barcelona Graduate School of Economics.
    2. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers, Federal Reserve Bank of Boston 95-6, Federal Reserve Bank of Boston.
    3. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
    4. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-13, C.V. Starr Center for Applied Economics, New York University.
    5. Henrik Jensen, . "Targeting Nominal Income Growth or Inflation?," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 99-23, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    6. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    7. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
    8. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(479), pages 402-432, April.
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