Endogenours monetary commitment

Jan Libich and Petr Stehlik

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of commitment, as well as its endogenous determination. Our main policy contribution consists in showing that the socially optimal degree of long-term monetary commitment depends on: (i) the potential short-term cost in terms of reduced stabilization flexibility, (ii) the potential benefit in terms of better anchored expectations, (iii) the structure of the economy, (iv) agents?expectations formation, and (v) the degrees of the central bank's conservatism (strictness) and ambition. The latter point implies substitutability between explicit inflation targeting and central bank goal-independence, and offers a possible explanation for the fact that countries with originally low degrees of central bank goal-independence have tended to commit more explicitly to price stability (legislate a unitary or hierarchical mandate rather than a dual mandate).

JEL-codes: C72 E52 E61 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2009-01
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Journal Article: Endogenous monetary commitment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2009-01

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