Publisher:
Dt. Bundesbank, Economic Research Centre, Frankfurt am Main
Conventional wisdom says that commitment eliminates the inflationary bias of monetary policy. However, this paper shows that the inflation bias can persist even when the central bank commits. A simple model is presented in which the central bank...
more
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Conventional wisdom says that commitment eliminates the inflationary bias of monetary policy. However, this paper shows that the inflation bias can persist even when the central bank commits. A simple model is presented in which the central bank precommits by setting the policy instrument, and the subsequent adjustment of inflation expectations is part of the transmission mechanism. Generally there is still an inflation bias, despite the absence of a time-inconsistency problem. It is caused by uncertainty about the economic disturbances to which the central bank responds. Only perfect transparency about economic information completely eliminates the inflation bias.
Publisher:
Dt. Bundesbank, Economic Research Centre, Frankfurt am Main
Conventional wisdom says that commitment eliminates the inflationary bias of monetary policy. However, this paper shows that the inflation bias can persist even when the central bank commits. A simple model is presented in which the central bank...
more
Conventional wisdom says that commitment eliminates the inflationary bias of monetary policy. However, this paper shows that the inflation bias can persist even when the central bank commits. A simple model is presented in which the central bank precommits by setting the policy instrument, and the subsequent adjustment of inflation expectations is part of the transmission mechanism. Generally there is still an inflation bias, despite the absence of a time-inconsistency problem. It is caused by uncertainty about the economic disturbances to which the central bank responds. Only perfect transparency about economic information completely eliminates the inflation bias.
