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The central bank cost constraint and output-inflation variability: a note on Cecchetti and Ehrmann 2000

Osama Sweidan () and Fadwa Kalaji ()
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Fadwa Kalaji: Assistant Professor of Economics

Economics Bulletin, 2005, vol. 5, issue 12, 1-6

Abstract: The goal of this paper is to extend the model of Cecchetti and Ehrmann 2000 to study the case of developing countries that have a constraint in conducting their monetary policies. Contrary to Cecchetti and Ehrmann 2000 model, our model shows that the existence of such a constraint i.e. cost restriction allows the aggregate demand shock to affect the output-inflation variability. Our model also shows that adding a monetary policy cost restriction to the central bank loss function leads to either a steeper or flatter efficient frontier. This implies that the effect of monetary policy to offset aggregate demand and supply shocks is reduced.

Keywords: Central; bank; losses (search for similar items in EconPapers)
JEL-codes: E0 E5 (search for similar items in EconPapers)
Date: 2005-11-29
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