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Inflation Inertia and Optimal Delegation of Monetary Policy

  • Keiichi Morimoto

    ()

    (Graduate School of Economics, Osaka University)

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    This paper analyzes the relationship between the optimal weight on output gap in the central bankfs loss function and the degree of inertia in a hybrid version of New Keynesian model with a pure discretionary inflation targeting. I present the policy recommendations as to the weight on output gap in the presence of endogenous persistence in inflation dynamics. Especially, I show that under endogenous persistence of inflation dynamics, even in discretionary monetary policy regime, a Rogofffs (1985) conservative central banker does not necessarily improve social welfare.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0905.pdf
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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-05.

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    Length: 14 pages
    Date of creation: Feb 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0905
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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    1. Jensen, Henrik, 1999. "Targeting Nominal Income Growth or Inflation?," CEPR Discussion Papers 2341, C.E.P.R. Discussion Papers.
    2. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    3. 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.
    4. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    5. Jordi Galí & Mark Gertler & J. David López-Salido, 2001. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Working Papers 44, Barcelona Graduate School of Economics.
    6. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
    7. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
    8. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," SSE/EFI Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
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