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Central Bank Reputation in a Forward-Looking Model

  • Loisel, O.

This paper examines whether reputation concerns can induce the central bank to implement the time-inconsistent optimal monetary policy in a standard New Keynesian model. The forward-looking nature of this model is in this respect interesting on two accounts: first, it worsens the time-inconsistency problem of optimal monetary policy by adding a stabilization bias to the possible inflation bias; second, it enables us to model more satisfactorily the reputation of the central bank by accounting for the coordination of the private agents on the punishment length. Our results suggest that the inflation bias and the stabilization bias can be overcome for the calibrations used in the literature. These results enable us to endogenize Woodford's timeless perspective and weaken the case for monetary policy delegation.

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Paper provided by Banque de France in its series Working papers with number 127.

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Length: 34 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bfr:banfra:127
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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  1. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  2. Kurozumi, Takushi, 2008. "Optimal sustainable monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1277-1289, October.
  3. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
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  5. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and mutual default," Staff Report 124, Federal Reserve Bank of Minneapolis.
  6. Kenneth Rogoff, 1986. "Reputational Constraints on Monetary Policy," NBER Working Papers 1986, National Bureau of Economic Research, Inc.
  7. Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March.
  8. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
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  10. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
  11. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
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  13. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  14. Dennis, Richard & Söderström, Ulf, 2002. "How Important Is Precommitment for Monetary Policy?," Working Paper Series 139, Sveriges Riksbank (Central Bank of Sweden).
  15. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  16. Klaus Adam & Roberto M. Billi, 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Research Working Paper RWP 05-08, Federal Reserve Bank of Kansas City.
  17. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
  18. Alan S. Blinder, 1997. "Distinguished Lecture on Economics in Government: What Central Bankers Could Learn from Academics--And Vice Versa," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 3-19, Spring.
  19. Walsh, Carl E, 2000. "Market Discipline and Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 249-71, April.
  20. Roberto M. Billi & Klaus Adam, 2004. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 67, Society for Computational Economics.
  21. Haubrich, Joseph G & Ritter, Joseph A, 2000. "Dynamic Commitment and Incomplete Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 766-84, November.
  22. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
  23. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  24. Vítor Gaspar & Frank Smets & David Vestin, 2007. "Is Time Ripe for Price Level Path Stability?," Working Papers w200719, Banco de Portugal, Economics and Research Department.
  25. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  26. 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.
  27. Sauer, Stephan, 2007. "Discretion rather than rules? When is discretionary policy-making better than the timeless perspective?," Working Paper Series 0717, European Central Bank.
  28. 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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  31. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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  36. n/a, 2001. "A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 154, National Institute of Economic and Social Research.
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  38. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  39. Walsh, Carl E., 2005. "Endogenous objectives and the evaluation of targeting rules for monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 889-911, July.
  40. Ulf Söderström, 2005. "Targeting Inflation with a Role for Money," Economica, London School of Economics and Political Science, vol. 72(288), pages 577-596, November.
  41. Richard Dennis, 2003. "Time-inconsistent monetary policies: recent research," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr11.
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