Inflation Targeting as a Way of Precommitment

Berthold Herrendorf

Oxford Economic Papers, 1998, vol. 50, issue 3, 431-48

Abstract: This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. The author argues that since this arrangement is transparent, it solves M. B. Canzoneri's private information problem, ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy. Copyright 1998 by Royal Economic Society.

Date: 1998
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