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Strategic discipline in monetary policy with private information: optimal targeting periods

  • Michelle R. Garfinkel
  • Seonghwan Oh

This paper analyzes the optimal choice of the length of time over which the monetary authority targets money growth, in a setting where the monetary authority’s lack of credibility potentially gives rise to an inflationary bias. When the monetary authority has some private information-e.g. a private forecast-that obscures the relevance of reputational considerations and the effectiveness of legislation to enforce the efficient policy, the targeting procedure serves as a device to diminish the inflationary bias while providing the monetary authority limited flexibility to react to its private information. The analysis strengthens the monetarist proposition that the monetary authority should follow a strict rule. Even when the monetary authority has a fairly accurate forecasting technology, the optimal targeting period can be very short, implying that limited or no flexibility in monetary policy would be optimal.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1990-001.

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Date of creation: 1990
Date of revision:
Publication status: Published in American Economic Review, March 1993
Handle: RePEc:fip:fedlwp:1990-001
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  1. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  3. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  4. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December.
  5. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  6. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  8. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  9. Kenneth Rogoff, 1986. "Reputational Constraints on Monetary Policy," NBER Working Papers 1986, National Bureau of Economic Research, Inc.
  10. Hillier, Brian & Malcomson, James M, 1984. "Dynamic Inconsistency, Rational Expectations, and Optimal Government Policy," Econometrica, Econometric Society, vol. 52(6), pages 1437-51, November.
  11. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  12. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
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