Inflation Rules with Consistent Escape Clauses
Simple inflation targets may be supplemented with an escape clause to be evoked in case the economy is hit by a major supply shock. In this paper, consistent solutions to the Flood and Isard (1990) escape clause model are derived in the spirit of Lohmann (1990), She showed that Flood and Isard's assumption of symmetric boundary values of shocks, outside of which the zero inflation rule should be broken, is inconsistent if the output or employment target differs from the natural rate. This is quantitatively important since the optimal boundary values in the consistent model are highly asymmetric. The effects of unemployment persistence on the optimal escape clause are also investigated in a two period version of the model. In the second period, monetary policy should respond more often to supply shocks if unemployment is persistent. The first period effect may be of either sign.
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|Date of creation:||Jan 1996|
|Publication status:||Forthcoming in European Economic Review.|
|Contact details of provider:|| Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden|
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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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.:
- 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.
- Maurice Obstfeld., 1996.
"Destabilizing Effects of Exchange-Rate Escape Clauses,"
Center for International and Development Economics Research (CIDER) Working Papers
C96-075, University of California at Berkeley.
- Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
- Obstfeld, Maurice, 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers 233439, University of California-Berkeley, Department of Economics.
- Obstfeld, Maurice, 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Department of Economics, Working Paper Series qt15n3p5dt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Obstfeld, Maurice, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," CEPR Discussion Papers 518, C.E.P.R. Discussion Papers.
- Maurice Obstfeld, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," NBER Working Papers 3603, National Bureau of Economic Research, Inc.
- 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.
- 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.
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