Rules versus discretion - A disinflation case

Roni Frish () and Nir Klein ()

Economics of Governance, 2004, vol. 6, issue 1, 61 pages

Abstract: This paper compares a strict inflation target regime to a conservative central bank regime to determine the monetary regime appropriate for a disinflation process. The analysis shows that in a two-period model, in which policymakers face given first-period inflationary expectations, a strict inflation target could be preferred to the appointment of a conservative central banker who has discretion. The result differs from that of Rogoff (1985), who assumed rational expectations and concluded that a conservative central banker is always preferable. The disadvantage of the conservative central banker derives from his tendency to accelerate disinflation relative to rate that maximizes social welfare. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Conservative central bank; inflation targets; monetary policy; reputation (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s10101-004-0081-y

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