Central bank reputation and conservativeness

Michele Frantianni and Haizhou Huang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In a monetary game played by the private sector and a central banks (CB), who has private information, reputation may not completely solve the CB time inconsistency problem. An alternative solution is CB Conservativeness. The optimal degree of CB Conservativeness is solved in both the reputational and non-reputational regime and reputation is proved to be substitute for conservativeness. Unless reputation works perfectly, the public can always gain from a conservative CB. Our model offers a unified framework to analyze both CB reputation and conservativeness. Our result can explain why low-reputation CBs find it worthwhile to peg the exchange rate to the currency of a high-reputation CB and why a highly reputable CB, like the Bundesbank, can afford to miss monetary targets more often than a less reputable CB.

Keywords: central banking; reputation; conservativeness; monetary game (search for similar items in EconPapers)
JEL-codes: E52 E58 L16 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1995-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119178

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