Inflationary Monetary Policy

Politique monétaire inflationniste

Romain Baeriswyl and Camille Cornand

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Abstract: The accommodating monetary policy of the 70s is usually rationalized within the Barro-Gordon framework. By contrast, this article shows that, even in the absence of inflationary bias, a credible central bank finds it optimal to accommodate monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. The ability of the central bank to stabilize prices rather than the output rises with its degree of transparency as the latter reinforces the effectiveness of the monetary instrument to stabilize prices. Our model shows that inflation is lower when the central bank is transparent with respect to its monetary instrument and highlights the relevance of central bank's disclosure for the effectiveness of monetary policy in an economy characterized by strategic complementarities and imperfect common knowledge.

Date: 2007
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Published in Revue Economique, 2007, 58 (3), pp.661-670. ⟨10.3917/reco.583.0661⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00279401

DOI: 10.3917/reco.583.0661

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