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Inflation Contracts, Inflation and Exchange Rate Targeting, and Uncertain Central Bank Preferences

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When central bank preferences are uncertain, delegation implemented by inflation or exchange rate targeting may be superior to delegation implemented through an inflation contract combined with an optimal inflation target. Distortion introduced by uncertainty about preferences into stabilization of shocks is largest under the contract regime. With targeting regimes this distortion is reduced by government increasing incentives to stabilize the targeted variable if uncertainty about preferences increases. A central banker with a populist bias improves outcomes under exchange rate targeting and the contract/optimal inflation target regime by reducing the distortion in stabilization induced by uncertain preferences.

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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0422.

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Length: 25 pgs.
Date of creation: 21 Dec 2004
Date of revision: 21 Dec 2004
Handle: RePEc:umc:wpaper:0422

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Keywords: Uncertain central bank preferences; inflation contracts; exchange rate targeting; inflation rate targeting;

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  19. repec:rus:hseeco:181565 is not listed on IDEAS
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