Strategic discipline in monetary policy with private information: optimal targeting periods

Michelle Garfinkel and Seonghwan Oh

No 1990-001, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper analyzes the optimal choice of the length of time over which the monetary authority targets money growth, in a setting where the monetary authority?s lack of credibility potentially gives rise to an inflationary bias. When the monetary authority has some private information-e.g. a private forecast-that obscures the relevance of reputational considerations and the effectiveness of legislation to enforce the efficient policy, the targeting procedure serves as a device to diminish the inflationary bias while providing the monetary authority limited flexibility to react to its private information. The analysis strengthens the monetarist proposition that the monetary authority should follow a strict rule. Even when the monetary authority has a fairly accurate forecasting technology, the optimal targeting period can be very short, implying that limited or no flexibility in monetary policy would be optimal.

Keywords: Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
Date: 1990
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Citations: View citations in EconPapers (6)

Published in American Economic Review, March 1993

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Working Paper: Strategic Discipline in Monetary Policy With Private Information: Optimal Targeting Periods (1990)
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DOI: 10.20955/wp.1990.001

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