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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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File URL: https://mpra.ub.uni-muenchen.de/11555/1/MPRA_paper_11555.pdf
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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. Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
  2. Andrew Blake & Tatiana Kirsanova, 2008. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Discussion Papers 0813, Exeter University, Department of Economics.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  4. 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.
  5. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
  6. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
  7. 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.
  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. Jensen, Henrik, 1999. "Targeting Nominal Income Growth or Inflation?," CEPR Discussion Papers 2341, C.E.P.R. Discussion Papers.
  10. 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.
  11. Ricardo Nunes & Davide Debortoli, 2011. "Political Disagreement, Lack of Commitment and the Level of Debt," 2011 Meeting Papers 127, Society for Economic Dynamics.
  12. Elmar Mertens, 2008. "Managing Beliefs about Monetary Policy under Discretion?," Working Papers 08.02, Swiss National Bank, Study Center Gerzensee.
  13. Andrea Tambalotti & Ernst Schaumburg, 2004. "An Investigation of the Gains from Commitment in Monetary Policy," Econometric Society 2004 North American Summer Meetings 282, Econometric Society.
  14. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  15. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  16. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
  17. William Roberds, 1986. "Models of policy under stochastic replanning," Staff Report 104, Federal Reserve Bank of Minneapolis.
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