Strategic Discipline in Monetary Policy with Private Information: Optimal Targeting Horizons

Michelle Garfinkel and Seonghwan Oh

American Economic Review, 1993, vol. 83, issue 1, 99-117

Abstract: This paper analyzes a multiperiod monetary targeting procedure as a possible resolution to the credibility problem in pol icy when the monetary authority has some private information. By limitin g the degree of flexibility permitted in policy, this procedure mitiga tes the credibility problem. As the length of the targeting horizon decreases, the severity of the credibility problem falls but at the expense of weakening the monetary authority's ability to pursue its stabilization goals. Based on model simulations, the analysis studi es the determinants of the optimal targeting horizon that balances the benefits of flexibility and discipline in policy. Copyright 1993 by American Economic Association.

Date: 1993
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