Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Time Inconsistency of Monetary Policy with Inflation Persistence

Contents:

Author Info

  • Richard Mash
Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper015.pdf
    Download Restriction: no

    Bibliographic Info

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

    as in new window
    Length:
    Date of creation: 01 Jul 2000
    Date of revision:
    Handle: RePEc:oxf:wpaper:15

    Contact details of provider:
    Postal: Manor Rd. Building, Oxford, OX1 3UQ
    Email:
    Web page: http://www.economics.ox.ac.uk/
    More information through EDIRC

    Related research

    Keywords: monetary policy; time inconsistency; inflation persistence;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Torsten Persson & Guido Tabellini, . "Political Economics and Macroeconomic Policy," Working Papers 121, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 81-97, June.
    3. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(2), pages 497-520, April.
    4. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
    6. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.).
    7. Lockwood, B. & Miller, M. & Zhang, L., 1994. "Designing Monetary Policy when Unemployment Persists," Discussion Papers, Exeter University, Department of Economics 9408, Exeter University, Department of Economics.
    8. Lippi, Francesco, 1999. "Revisiting the Case for a Populist Central Banker," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2306, C.E.P.R. Discussion Papers.
    9. Bevger, H. & Haan, J. de & Eijffinger, S.C.W., 2000. "Central Bank Independence: An Update of Theory and Evidence," Open Access publications from Tilburg University urn:nbn:nl:ui:12-82768, Tilburg University.
    10. Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 64(0), pages 28-50, Suppl..
    11. Anne Sibert, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CESifo Working Paper Series 226, CESifo Group Munich.
    12. Andrew Haldane & Danny Quah, 2000. "UK Philips Curves and Monetary Policy," CEP Discussion Papers dp0444, Centre for Economic Performance, LSE.
    13. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 99-112, June.
    14. Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(451), pages 1795-1809, November.
    15. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
    16. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
    17. Goodhart, Charles A E & Huang, Haizhou, 1998. "Time Inconsistency in a Model with Lags, Persistence, and Overlapping Wage Contracts," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 378-96, July.
    18. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 338-50, August.
    19. 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.
    20. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, Elsevier, vol. 43(7), pages 1317-1344, June.
    21. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 273-86, March.
    22. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 201-06, May.
    23. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
    24. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, American Economic Association, vol. 75(3), pages 530-38, June.
    25. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    26. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
    27. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 49(3), pages 211-28, September.
    28. Laurence Ball, 1991. "The genesis of inflation and the costs of disinflation," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 439-461.
    29. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier.
    30. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
    31. Lockwood, Ben, 1997. "State-Contingent Inflation Contracts and Unemployment Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 286-99, August.
    32. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
    33. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 211-21, April.
    34. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-34, July.
    35. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 513-30, July.
    36. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:15. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.