IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts

Listed author(s):
  • Svensson, L.E.O.

Inflation target regimes (like those of New Zealand, Canada, U.K., Sweden and Finland) are interpreted as having explicit inflation targets and implicit output/unemployment targets. Without output-unemployment persistence delegation of monetary policy to a discretionary instrument-independent central bank with an optimal inflation target can eliminate the discretionary inflation bias, mimic the optimal linear inflation contract suggested by Walsh and extended by Persson and Tabellini, and achieve the equilibrium corresponding to an optimal rule with commitment. Thus an `inflation target- conservative' central bank with an inflation target equal to the socially best inflation rate less any inflation bias dominates a Rogoff weight-conservative central bank with increased weight on inflation stabilizatiojn, which suboptimally increases output/unemployment variability. With output/ unemployment persistence, a constant inflation target is equivalent to a constant linear inflation contract. They can both eliminate the average inflation bias but not the state-contingent part of the inflation bias. Inflation variability is too high, and output variability too low, compared to the equilibrium corresponding to an optimal rule. An optimal state- contingent inflation target can remove all inflation bias, but in contrast to an optimal state-contingent linear inflation contract it still leaves inflation variability too high. Delegation with an optimal state-contingent inflation target to a Rogoff `weight-conservative' central bank can then achieve the equilibrium corresponding to an optimal rule. Inflation targets may on average be exceeded, and they may have imperfect credibility, but they may usefully reduce inflation, and they appear much easier to implement.

(This abstract was borrowed from another version of this item.)

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Stockholm - International Economic Studies in its series Papers with number 595.

as
in new window

Length: 39 pages
Date of creation: 1995
Handle: RePEc:fth:stocin:595
Contact details of provider: Postal:
UNIVERSITY OF STOCKHOLM, INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES, S- 106 91 STOCKHOLM SWEDEN.

Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  2. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-1070, December.
  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  4. Lars E.O. Svensson, 1993. "The Simplest Test of Inflation Target Credibility," NBER Working Papers 4604, National Bureau of Economic Research, Inc.
  5. Canzoneri, Matthew B & Nolan, Charles & Yates, Anthony, 1997. "Mechanisms for Achieving Monetary Stability: Inflation Targeting versus the ERM," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 46-60, February.
  6. Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 378-393, April.
  7. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, vol. 104(427), pages 1424-1436, November.
  8. Carl E. Walsh, 1995. "Recent Central-Bank Reforms and the Role of Price Stability as the Sole Objective of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 237-252 National Bureau of Economic Research, Inc.
  9. José Viñals & Charles Goodhart, 1994. "Strategy and Tactics of Monetary Policy: Examples from Europe and the Antipodes," FMG Special Papers sp61, Financial Markets Group.
  10. Charles A. E. Goodhart & Jose Vinals, 1994. "Strategy an tactics of monetary policy: examples from Europe and the Antipodes," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 139-194.
  11. Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
  12. Currie, David & Levine, Paul L & Pearlman, Joseph, 1995. "Can Delegation be Counterproductive? The Choice of 'Conservative' Bankers in Open Economies," CEPR Discussion Papers 1148, C.E.P.R. Discussion Papers.
  13. 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.
  14. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-162, May.
  15. Charles Goodhart & José Viñals, 1994. "Strategy and Tactics of Monetary Policy: Examples from Europe and the Antipodes," Working Papers 9425, Banco de España;Working Papers Homepage.
  16. Walsh, Carl E, 1995. "Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1179-1191, November.
  17. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
  18. Jonsson, G., 1995. "Monetary Politics and Unemployment Persistence," Papers 593, Stockholm - International Economic Studies.
  19. Gottfries, Nils & Horn, Henrik, 1987. "Wage Formation and the Persistence of Unemployment," Economic Journal, Royal Economic Society, vol. 97(388), pages 877-884, December.
  20. Lars E.O. Svensson, 1995. "The Swedish Experience of an Inflation Target," NBER Working Papers 4985, National Bureau of Economic Research, Inc.
  21. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-211, May.
  22. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  23. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-345, August.
  24. Lockwood, Ben & Philippopoulos, Apostolis, 1994. "Insider Power, Unemployment Dynamics and Multiple Inflation Equilibria," Economica, London School of Economics and Political Science, vol. 61(241), pages 59-77, February.
  25. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-206, May.
  26. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  27. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  28. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  29. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  30. 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 473-491, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fth:stocin:595. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.