 The Implications of Transmission and Information Lags for the Stabilization Bias and Optimal DelegationJean-Paul Lam and Florian Pelgrin Staff Working Papers from Bank of Canada Abstract: In two recent papers, Jensen (2002) and Walsh (2003), using a hybrid New Keynesian model, demonstrate that a regime that targets either nominal income growth or the change in the output gap can effectively replicate the outcome under commitment and hence reduce the size of the stabilization bias. Moreover, these two targeting regimes have been shown to outperform a regime that targets inflation, except when inflation expectations are predominantly backward looking. In this paper, the authors modify an otherwise conventional New Keynesian model to include transmission and information lags, two key problems faced by policy-makers, and they examine whether the results from the baseline model are robust to these two modifications. The authors find that the gains from commitment are considerably reduced when the model includes these two features, which implies that optimal delegation is less important. Furthermore, a regime that targets CPI inflation in a conservative manner is found to perform well and even outperforms the targeting regimes advocated by Jensen and Walsh under certain conditions. Keywords: Transmission of monetary policy; Inflation targets (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-37 Access Statistics for this paper More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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