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Designing Monetary Policy when Unemployment Persists

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  • Lockwood, B.
  • Miller, M.
  • Zhang, L.

Abstract

This paper investigates how unemployment persistence affects the various proposals advanced as solutions to the problem of inflation bias (namely delegation, contracts and reputation). First, the contract solution is extended to cover the dynamic case. However, as such contracts are not used in practice, we focus on delegation solution. We find that the delegation of policy to a conservative Central Banker still proves attractive in a setting where unemployment persists; but the degree of conservatism depends critically on how the Central Banker discounts the future. Where the Central Banker discounts the future hardly at all, we find that the appropriate strategy is to delegate to candidates who are more conservative the more persistant is unemployment. Finally, we consider briefly how reputational factors might affect this result.

Suggested Citation

  • Lockwood, B. & Miller, M. & Zhang, L., 1994. "Designing Monetary Policy when Unemployment Persists," Discussion Papers 9408, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:9408
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    References listed on IDEAS

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    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
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    7. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
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    10. Levine, Paul L & Pearlman, Joseph, 1994. "Labour Market Structure, Conservative Bankers and the Feasibility of Monetary Union," CEPR Discussion Papers 903, C.E.P.R. Discussion Papers.
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    12. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    13. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    Keywords

    monetary policy ; unemployment;

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