Optimal reputation building in the New Keynesian model

Yang K. Lu, Robert G. King and Ernesto Pasten

Journal of Monetary Economics, 2016, vol. 84, issue C, 233-249

Abstract: We study the optimal committed monetary policy when the private sector has imperfect information and has to infer the central banker׳s ability to commit. The optimal policy is designed to influence learning and improve the central banker׳s reputation of being committed. The reputation building implies that when a committed central banker first takes office, he should resist the temptation to stimulate output with initially high but declining inflation; he should reverse a missed inflation target rather than accommodate it; and he should adopt a less accommodative inflation response to a cost-push shock than a full commitment solution suggests.

Keywords: Imperfect credibility; Optimal monetary policy; Time inconsistency (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:84:y:2016:i:c:p:233-249

DOI: 10.1016/j.jmoneco.2016.10.010

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