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Inflation Targeting as a Way of Precommitment

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  • Herrendorf, Berthold

Abstract

This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. The author argues that since this arrangement is transparent, it solves M. B. Canzoneri's private information problem, ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy. Copyright 1998 by Royal Economic Society.

Suggested Citation

  • Herrendorf, Berthold, 1998. "Inflation Targeting as a Way of Precommitment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 431-448, July.
  • Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:431-48
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    References listed on IDEAS

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    1. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-1070, December.
    2. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, pages 98-114.
    3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    5. Garfinkel, Michelle R & Oh, Seonghwan, 1993. "Strategic Discipline in Monetary Policy with Private Information: Optimal Targeting Horizons," American Economic Review, American Economic Association, vol. 83(1), pages 99-117, March.
    6. Walsh, Carl E, 1995. "Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1179-1191, November.
    7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    8. Driffill, John & Schultz, Christian, 1992. "Wage Setting and Stabilization Policy in a Game with Renegotiation," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 440-459, July.
    9. Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 378-393, April.
    10. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 513-530, July.
    11. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-345, August.
    12. Minford, Patrick, 1995. "Time-Inconsistency, Democracy, and Optimal Contingent Rules," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 195-210, April.
    13. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-206, May.
    14. Al-Nowaihi, A & Levine, Paul L, 1996. "Independent but Accountable: Walsh Contracts and the Credibility Problem," CEPR Discussion Papers 1387, C.E.P.R. Discussion Papers.
    15. Herrendorf, Berthold & Lockwood, Ben, 1997. "Rogoff's "Conservative" Central Banker Restored," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 476-495, November.
    16. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    17. al-Nowaihi, Ali & Levine, Paul, 1994. "Can reputation resolve the monetary policy credibility problem?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 355-380, April.
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    Cited by:

    1. Gartner, Manfred, 2000. " Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 527-561, December.
    2. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
    3. Lu, Yang K. & King, Robert G. & Pasten, Ernesto, 2016. "Optimal reputation building in the New Keynesian model," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 233-249.
    4. Carl E. Walsh, 2002. "When should central bankers be fired?," Economics of Governance, Springer, vol. 3(1), pages 1-21, March.
    5. Mihailov, Alexander & Ullrich, Katrin, 2007. "Independence and Accountability of Monetary and Fiscal Policy Committees," ZEW Discussion Papers 07-044, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Analysis Research Group Working Papers earg-wp2007-13, Henley Business School, Reading University.
    7. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS
    8. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
    9. M. Lossani & P. Natale, & P. Tirelli, 1997. "Fiscal Policy and Imperfectly Credible Inflation Targets: Should We Appoint Expenditure-Conservative Central Bankers?," Working Papers 9707, Business School - Economics, University of Glasgow.
    10. Driffill, John & Rotondi, Zeno, 2003. "Delegation of Monetary Policy: More than a Relocation of the Time-Inconsistency Problem," CEPR Discussion Papers 3923, C.E.P.R. Discussion Papers.
    11. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, vol. 49(1), pages 31-50, October.
    12. Rotondi, Zeno, 2000. "Credibility of optimal monetary delegation: do we really need prohibitive reappointment costs?," Discussion Paper Series In Economics And Econometrics 0003, Economics Division, School of Social Sciences, University of Southampton.
    13. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, vol. 13(4), pages 341-362, October.
    14. Helder Ferreira de Mendonça & José Simão Filho, 2011. "Central Bank Transparency and Financial Market: Evidence for the Brazilian Case," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(1), pages 51-67.

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