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Central bank reputation in a forward-looking model

  • Loisel, Olivier

This paper examines whether reputation concerns can induce the central bank to implement the time-inconsistent optimal monetary policy in the standard New Keynesian model. Interestingly, the forward-looking nature of this model enables us to account for the coordination of the private agents on the punishment length of their trigger strategy. Our results suggest that both the inflation bias and the stabilization bias can be overcome by a reputation-concerned central bank for the calibrations used in the literature. These results enable us to endogenize Woodford's timeless perspective and tend to weaken the case for recent monetary policy delegation proposals.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 3718-3742

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3718-3742
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  8. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
  9. Adam, Klaus & Billi, Roberto M., 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," CFS Working Paper Series 2005/16, Center for Financial Studies (CFS).
  10. V. V. Chari & Patrick E. Kehoe, 1990. "Sustainable Plans and Mutual Default," IMF Working Papers 90/22, International Monetary Fund.
  11. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  12. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
  13. Klaus Adam & Roberto M. Billi, 2005. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Research Working Paper RWP 05-07, Federal Reserve Bank of Kansas City.
  14. Richard Dennis, 2003. "Time-inconsistent monetary policies: recent research," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr11.
  15. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
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  18. Jean-Paul Lam & Florian Pelgrin, 2004. "The Implications of Transmission and Information Lags for the Stabilization Bias and Optimal Delegation," Working Papers 04-37, Bank of Canada.
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  20. Kosuke Aoki & Kalin Nikolov, 2004. "Rule-based monetary policy under central bank learning," Bank of England working papers 235, Bank of England.
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  26. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May.
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