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

  • Svensson, L.E.O.

Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an 'inflation-target-conservative' central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff 'weight-conservative' central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment. Copyright 1997 by American Economic Association.

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

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