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The macroeconomic effect of external pressures on monetary policy

  • Davide Debortoli
  • Ricardo Nunes

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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 944.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:944
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  1. Chappell, Henry W, Jr & Havrilesky, Thomas M & McGregor, Rob Roy, 1993. "Partisan Monetary Policies: Presidential Influence through the Power of Appointment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 185-218, February.
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  5. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
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  7. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Economics Working Papers ECO2011/15, European University Institute.
  8. Faust, Jon & Irons, John S., 1999. "Money, politics and the post-war business cycle," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 61-89, February.
  9. Jon Faust & John Irons, 1996. "Money, politics and the post-war business cycle," International Finance Discussion Papers 572, Board of Governors of the Federal Reserve System (U.S.).
  10. Steven M. Sheffrin, 1989. "Evaluating Rational Partisan Business Cycle Theory," Economics and Politics, Wiley Blackwell, vol. 1(3), pages 239-259, November.
  11. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
  12. Roberds, William, 1987. "Models of Policy under Stochastic Replanning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 731-55, October.
  13. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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