Central Bank Reputation in a Forward-Looking Model

Olivier Loisel

Working papers from Banque de France

Abstract: This paper examines whether reputation concerns can induce the central bank to implement the time-inconsistent optimal monetary policy in a standard New Keynesian model. The forward-looking nature of this model is in this respect interesting on two accounts: first, it worsens the time-inconsistency problem of optimal monetary policy by adding a stabilization bias to the possible inflation bias; second, it enables us to model more satisfactorily the reputation of the central bank by accounting for the coordination of the private agents on the punishment length. Our results suggest that the inflation bias and the stabilization bias can be overcome for the calibrations used in the literature. These results enable us to endogenize Woodford's timeless perspective and weaken the case for monetary policy delegation.

Keywords: Commitment; Discretion; Inflation bias; Reputation; Stabilization bias; Timeless perspective. (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Central bank reputation in a forward-looking model (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:127

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