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The Time Inconsistency of Monetary Policy with Inflation Persistence

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  • Richard Mash

Abstract

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.

Suggested Citation

  • Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:15
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper015.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mash, Richard, 2002. "Monetary Policy with an Endogenous Capital Stock When Inflation Is Persistent," Manchester School, University of Manchester, vol. 70(0), pages 55-86, Supplemen.

    More about this item

    Keywords

    monetary policy; time inconsistency; inflation persistence;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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