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Delegation and Loose Commitment

  • Nunes, Ricardo

This paper analyzes and compares the performance of different delegation schemes when the central bank has imperfect commitment. A continuum of loose commitment possibilities is considered ranging from full commitment to full discretion. The results show that the performance of inflation targeting improves substantially with higher commitment levels. On the other hand, the performance of other targeting regimes does not necessarily improve with the commitment level of the central bank. While it was previously thought that inflation targeting is inferior to other targeting regimes, the results show that it can be the best performing regime as long as the commitment level is not too low. These results may provide a theoretical explanation for the high popularity of inflation targeting among central banks.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11555.

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Date of creation: Oct 2008
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Handle: RePEc:pra:mprapa:11555
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  1. Ernst Schaumburg & Andrea Tambalotti, 2003. "An investigation of the gains from commitment in monetary policy," Staff Reports 171, Federal Reserve Bank of New York.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  3. Andrew Blake & Tatiana Kirsanova, 2008. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Discussion Papers 0813, Exeter University, Department of Economics.
  4. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May.
  5. Jinill Kim & Dale Henderson, 2002. "Inflation Targeting and Nominal Income Growth Targeting: When and Why Are They Suboptimal?," Computing in Economics and Finance 2002 59, Society for Computational Economics.
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  7. William Roberds, 1986. "Models of policy under stochastic replanning," Staff Report 104, Federal Reserve Bank of Minneapolis.
  8. Dennis, Richard, 2007. "Optimal Policy In Rational Expectations Models: New Solution Algorithms," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 31-55, February.
  9. Elmar Mertens, 2010. "Managing beliefs about monetary policy under discretion," Finance and Economics Discussion Series 2010-11, Board of Governors of the Federal Reserve System (U.S.).
  10. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
  11. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  12. Roel M.W.J. Beetsma & Henrik Jensen, . "Optimal Inflation Targets, “Conservative” Central Banks, and Linear Inflation Contracts: Comment," EPRU Working Paper Series 98-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  13. Jensen, Henrik, 1999. "Targeting Nominal Income Growth or Inflation?," CEPR Discussion Papers 2341, C.E.P.R. Discussion Papers.
  14. Marcet, A. & Marimon, R., 1998. "Recursive Contracts," Economics Working Papers eco98/37, European University Institute.
  15. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  16. Ricardo Nunes & Davide Debortoli, 2007. "Political Disagreement, Lack of Commitment and the Level of Debt," 2007 Meeting Papers 725, Society for Economic Dynamics.
  17. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
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