Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts

Lars Svensson

American Economic Review, 1997, vol. 87, issue 1, 98-114

Abstract: Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an 'inflation-target-conservative' central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff 'weight-conservative' central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment. Copyright 1997 by American Economic Association.

Date: 1997
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Related works:
Working Paper: Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts (1995)
Working Paper: Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts (1995)
Working Paper: Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts (1995)
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