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The Time Inconsistency of Monetary Policy with Inflation Persistence

  • Richard Mash
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    In a monetary policy model incorporating partial persistence in inflation it is shown that inflation bias is reduced and the response to shocks improved if the policy maker has a discount rate lower than its true social value. Thus a patient central banker is shown to be a third mechanism for offsetting time inconsistency problems in addition to Rogoff`s conservative central banker and the principal-agent approach of Walsh. The paper also analyses outcomes under the latter regimes and the optimal rule, finding important differences from the results of earlier literature that excludes inflation persistence.

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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper015.pdf
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    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 15.

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    Date of creation: 01 Jul 2000
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    Handle: RePEc:oxf:wpaper:15
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    6. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
    7. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    8. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
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    11. Lockwood, B. & Miller, M. & Zhang, L., 1994. "Designing Monetary Policy when Unemployment Persists," Discussion Papers 9408, Exeter University, Department of Economics.
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    30. Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 28-50, Suppl..
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    32. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, University of Manchester, vol. 49(3), pages 211-28, September.
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