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The Optimal Degree of Commitment to an Intermediate Monetary Target

Listed author(s):
  • Kenneth Rogoff

Society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places "too large" a weight on inflation-rate stabilization relative to employment stabilization. Although having such an agent head the central bank reduces the time-consistent rate of inflation, it suboptimally raises the variance of employment when supply shocks are large. Using an envelope theorem, we show that the ideal agent places a large, but finite, weight on inflation. The analysis also provides a new framework for choosing among alternative intermediate monetary targets.

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File URL: http://hdl.handle.net/10.2307/1885679
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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 100 (1985)
Issue (Month): 4 ()
Pages: 1169-1189

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Handle: RePEc:oup:qjecon:v:100:y:1985:i:4:p:1169-1189.
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