TY - JOUR
T1 - Inflation targeting as a way of precommitment
AU - Herrendorf, Berthold
N1 - Funding Information:
This paper is based on Chapter 4 of my PhD thesis 'Solutions to the Time Consistency Problem of Optimal Monetary Policy' (European University Institute, Florence, 1996). I would like to thank my advisor Mark Salmon and the members of my thesis committee, Michael Artis, Matthew Canzoneri, John Driffill, and Manfred J. M. Neumann, for their suggestions, the European Investment Bank for financial support, and Ali al Nowaihi, Martin Cripps, Henrick Jensen, Mervyn King, Paul Levine, Ramon Marimon, Akos Valentinyi, and Carl Walsh for comments. Furthermore, the paper has been improved by suggestions of the participants in presentations at the Bank of England, European University Institute, Leicester, the workshop on 'Central Bank Independence, Contracts and Reputation' at Warwick, the EEA conference at Istanbul, and the conference on "The Political Economy of Central Bank Independence' at St Peter's College (Oxford), which all took place in 1996.1 take full responsibility for all errors.
PY - 1998/7
Y1 - 1998/7
N2 - This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. We argue that since this arrangement is transparent, it solves Canzoneri's private information problem, ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy.
AB - This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. We argue that since this arrangement is transparent, it solves Canzoneri's private information problem, ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy.
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U2 - 10.1093/oxfordjournals.oep.a028655
DO - 10.1093/oxfordjournals.oep.a028655
M3 - Article
AN - SCOPUS:0000497704
SN - 0030-7653
VL - 50
SP - 431
EP - 448
JO - Oxford Economic Papers
JF - Oxford Economic Papers
IS - 3
ER -