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The Time Inconsistency of Monetary Policy with Inflation Persistence

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  • Richard Mash
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    Abstract

    In a monetary policy model incorporating partial persistence in inflation it is shown that inflation bias is reduced and the response to shocks improved if the policy maker has a discount rate lower than its true social value. Thus a patient central banker is shown to be a third mechanism for offsetting time inconsistency problems in addition to Rogoff`s conservative central banker and the principal-agent approach of Walsh. The paper also analyses outcomes under the latter regimes and the optimal rule, finding important differences from the results of earlier literature that excludes inflation persistence.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 15.

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    Date of creation: 01 Jul 2000
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    Handle: RePEc:oxf:wpaper:15

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    Keywords: monetary policy; time inconsistency; inflation persistence;

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