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Delegating Optimal Monetary Policy Inertia

  • Bilbiie, Florin Ovidiu

This paper shows that absent a commitment technology, central banks can nevertheless achieve the (timeless-)optimal commitment equilibrium if they are delegated with an objective function that is different from the societal one. In a prototypical forward-looking New Keynesian model, I develop a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov-perfect equilibrium. I study the optimal design of some policy regimes that are nested within this framework: inflation, output-gap growth and nominal income growth targeting; and inflation and output-gap contracts. Notably, since the timeless-optimal equilibrium is time-consistent, so is any delegation scheme that implements it.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7482.

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Date of creation: Oct 2009
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Handle: RePEc:cpr:ceprdp:7482
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