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Optimal Central Bank Conservativeness in an Open Economy

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  • Eijffinger, Sylvester
  • Hoeberichts, Marco
  • Schaling, Eric

Abstract

This paper develops a graphical method to determine the optimal degree of central bank conservativeness in an open economy. Unlike Rogoff (1985), the upper and lower bounds of the interval containing the optimal degree of conservativeness are expressed in terms of the structural parameters of the model. It is shown that optimal central bank conservativeness is higher, the higher the natural rate of unemployment, the greater the benefits of unanticipated inflation, the less inflation-averse society, the smaller the variance of productivity shocks, the smaller real exchange rate variability and the smaller the openness of the economy. These propositions are tested for nineteen industrial countries for the period 1960-93. In testing the model we employ a latent variables method (LISREL) in order to distinguish between actual and optimal monetary regimes. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Eijffinger, Sylvester & Hoeberichts, Marco & Schaling, Eric, 2000. "Optimal Central Bank Conservativeness in an Open Economy," Public Choice, Springer, vol. 105(3-4), pages 339-355, December.
  • Handle: RePEc:kap:pubcho:v:105:y:2000:i:3-4:p:339-55
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    Cited by:

    1. Francisco Candel-Sánchez & Juan Cristóbal Campoy-Miñarroy, 2004. "Is the Walsh Contract Really Optimal?," Public Choice, Springer, vol. 120(1_2), pages 29-39, July.
    2. Daniels, Joseph P. & Nourzad, Farrokh & VanHoose, David D., 2006. "Openness, centralized wage bargaining, and inflation," European Journal of Political Economy, Elsevier, vol. 22(4), pages 969-988, December.
    3. D'Amato, Marcello & Martina, Riccardo, 2005. "Credibility and commitment of monetary policy in open economies," European Journal of Political Economy, Elsevier, vol. 21(4), pages 872-902, December.
    4. H.J. Roelfsema, 2006. "Why are Federal Central Banks more Activist?," Working Papers 06-06, Utrecht School of Economics.
    5. Cavusoglu, Nevin, 2012. "LISREL growth model on direct and indirect effects using cross-country data," Economic Modelling, Elsevier, vol. 29(6), pages 2362-2370.

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