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The macroeconomic effect of external pressures on monetary policy

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  • Davide Debortoli
  • Ricardo Nunes

Abstract

Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt \" more liberal\" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even \" more conservative\" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt \" more liberal\" objectives may be aiming. We also discuss the opposite case, where objectives may become \" more conservative\" in the future, which may be the relevant case for countries considering the adoption of inflation targeting.

Suggested Citation

  • Davide Debortoli & Ricardo Nunes, 2008. "The macroeconomic effect of external pressures on monetary policy," International Finance Discussion Papers 944, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:944
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    References listed on IDEAS

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    Cited by:

    1. Davide Debortoli & Ricardo Nunes, 2011. "Monetary regime switches and unstable objectives," International Finance Discussion Papers 1036, Board of Governors of the Federal Reserve System (U.S.).
    2. Philip Arestis & Michail Karoglou & Kostas Mouratidis, 2016. "Monetary Policy Preferences of the EMU and the UK," Manchester School, University of Manchester, vol. 84(4), pages 528-550, July.

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