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How Conservative Does the Central Banker Have to Be? On the Treatment of Expectations under Discretionary Policymaking

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Abstract

This paper explores an issue that arises in the delegation process. The paper shows that a myopic central banker, one who treats expectations as constant in setting discretionary policy, can replicate the behavior of output and inflation under policy from a timeless perspective. For that to happen, society must delegate a price level target or a speed limit policy to a central banker who is more weight-conservative than society.

Suggested Citation

  • Alfred V. Guender, 2007. "How Conservative Does the Central Banker Have to Be? On the Treatment of Expectations under Discretionary Policymaking," Working Papers in Economics 07/04, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:07/04
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    File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/0704.pdf
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    References listed on IDEAS

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    1. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-295, August.
    2. 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.
    3. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    4. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    5. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
    6. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    7. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56.
    8. Richard T. Froyen & Alfred V. Guender, 2007. "Optimal Monetary Policy under Uncertainty," Books, Edward Elgar Publishing, number 12510.
    9. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
    10. Froyen, Richard T. & Guender, Alfred V., 2014. "Price level targeting and the delegation issue in an open economy," Economics Letters, Elsevier, vol. 122(1), pages 12-15.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    New Keynesian Model; Price Level Targeting; Speed Limit Policy; Conservative Central Banker;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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