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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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    1. 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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    29. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
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