IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Inflation Targeting: The Delegation and Co-Ordination of Monetary Policy

Listed author(s):
  • S. G. Brian Henry


    (London Business School)

  • Stephen G. Hall


    (Imperial College)

  • James Nixon


    (London Business School)

We begin reviewing the standard Barro-Gordon model of inflation bias and considering the delegation of monetary policy to a more conservative central banker as suggested by Rogoff. We emphasise how inflation bias can be reduced, seemingly at the expense of increased stabilisation cost. We note the tendency to justify delegating monetary policy to an independent central bank based on these highly stylised analytical models of inflation. We emphasise the need to investigate empirically the implications of such a shift in policy regime without excluding important real-world complexities. An obvious omission from the Rogoff model is the possibility of more than one instrument of macroeconomic policy and their coordination. So we recover the model of Nordhaus, who considers the possibility of a non-cooperative game between the fiscal authority and an independent central bank. We note that the predictions from this model seem relevant to the recent experience of the UK. A substantial part of the debate on means available for authorities to reduce inflation concerns the importance expectations and credibility play in determining the output cost of any inflation reduction. With rational expectations, the optimal policy moves immediately to enforce a particular inflation target, an assumption bearing little relevance to reality. So we consider the case where agents "learn" about changes in monetary policy over time. Implementing this learning model is a major break with the empirical literature on the political economy of inflation control that has been dominated by the assumption of rational expectations. Recent theoretical work emphasises the importance of agents' "learning" over time to converge on the rational expectation, but with a lag. We favour this approach. Our empirical work focuses on two issues. First, we consider the implications of delegation monetary policy to a more "conservative" unitary authority with control over both fiscal and monetary policy. Our results support the conclusions of the theoretical models: delegating monetary policy to an institution with a longer time horizon is less likely to lead to an attempt to exploit the inflation-output trade off and so reduces the inflation bias in discretionary policy. Second, we consider the operation of stabilisation policy in a stochastic environment. Using open loop optimal control, we are able to model monetary and fiscal policy in terms of a 'game' played between the central bank and a fiscal authority, where the two 'players' may have very different objectives. The central bank is concerned with inflation while the fiscal authority is concerned with growth and the public sector deficit. We are thus able to consider whether the gain from the reduced inflation bias is outweighed by the inability to coordinate monetary and fiscal policy in response to shocks.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 842.

in new window

Date of creation: 01 Mar 1999
Handle: RePEc:sce:scecf9:842
Contact details of provider: Postal:
CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA

Fax: +1-617-552-2308
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Froyen, Richard T. & Waud, Roger N., 1995. "Central bank independence and the output-inflation tradeoff," Journal of Economics and Business, Elsevier, vol. 47(2), pages 137-149, May.
  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  3. Clive Briault & Andrew Haldane & Mervyn King, 1996. "Independence and Accountability," Bank of England working papers 49, Bank of England.
  4. Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, vol. 108(451), pages 1795-1809, November.
  5. Julia Darby & Simon Wren-Lewis, 1993. "Is There a Cointegrating Vector for UK Wages?," Journal of Economic Studies, Emerald Group Publishing, vol. 20(1/2), pages 87-115, January.
  6. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  7. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  8. Maria Demertzis & Andrew Hughes Hallett & Nicola Viegi, 1999. "Can the ECB be Truly Independent? Should It Be?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 217-240, September.
  9. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
  10. repec:sae:niesru:v:161:y::i:1:p:91-110 is not listed on IDEAS
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf9:842. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.