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Informational Accuracy and the Optimal Monetary Regime

  • David Demery
  • Nigel W. Duck

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    King (1997) develops a framework for assessing four monetary regimes: an optimal state-contingent rule; a non-contingent rule; pure discretion; and a Rogoffian conservative central banker. Using this framework we show (a) that King is wrong to claim that it implies that an optimally-conservative central banker always dominates a fixed-rule monetary regime; (b) that if the private sector has a signal of the shock to which monetary policy responds - the accuracy of which is exogenously fixed - then either the optimal state-contingent rule or the optimally-conservative central bank can dominate; and (c) that if the private sector optimally chooses the accuracy of its signal then any regime can dominate.

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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp05571.pdf
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    Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 05/571.

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    Length: 19 pages
    Date of creation: Apr 2005
    Date of revision:
    Handle: RePEc:bri:uobdis:05/571
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    1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
    2. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July.
    3. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
    4. 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.
    5. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May.
    6. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
    7. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
    8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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