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Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts

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  • Svensson, Lars E O

Abstract

Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an 'inflation-target-conservative' central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff 'weight-conservative' central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment. Copyright 1997 by American Economic Association.

Suggested Citation

  • Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    • Handle: RePEc:aea:aecrev:v:87:y:1997:i:1:p:98-114
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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