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Institutional Arrangements for Monetary Policy When Output Is Persistent

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  • Roisland, Oistein

Abstract

A discretionary monetary policy gives rise to a constant average inflation bias, a state-contingent inflation bias, and a stabilization bias when output is persistent. The paper considers institutional arrangements ("contracts") for central banks that remove these policy imperfections. The average and state-contingent inflation biases can be removed by directing the central bank to target the growth of nominal income and appoint a central banker with a specific relative weight attached to output stabilization. An alternative to this institutional solution is to direct central banks to aim for a feasible output target. Although this would remove the inflationary biases, the government must appoint a "liberal" (as opposed to "conservative") central banker in order to implement optimal stabilization.

Suggested Citation

  • Roisland, Oistein, 2001. "Institutional Arrangements for Monetary Policy When Output Is Persistent," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 994-1014, November.
  • Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:4:p:994-1014
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    References listed on IDEAS

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    Cited by:

    1. Sang-Kun Bae & Ronald A. Ratti, 2008. "Conservative Central Banks and Nominal Growth, Exchange Rate and Inflation Targets," Economica, London School of Economics and Political Science, vol. 75(299), pages 549-568, August.

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