Central Bank Reputation and Conservativeness

Haizhou Huang () and Michele Fratianni

FMG Discussion Papers from Financial Markets Group

Abstract: In a monetary game played by he private sector and a central banks (CB), who has private information, reputation may not completely solver the CB time inconsistency problem. An alternative solution is CB Conservativeness. The optimal degree of CB Conservativeness is solved in both the reputatuional and non-reputational regime and reputatuion 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 wy low-reputation CBs find it worthwhile to peg the exchange rate to the currency of a high-reputation CB and why a gighly reputable CB, like the Bundesbank, can afford to miss monetary targets more often than a less reputable CB.

Date: 1995-09
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