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The Optimality and Controllability of Monetary Policy through Delegation with Consistent Targets

Huiping Yuan (), Stephen Miller () and Langnan Chen ()
Additional contact information
Langnan Chen: Institute for Economics, Sun Yat-sen University

No 909, Working Papers from University of Nevada, Las Vegas , Department of Economics

Abstract: This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan.

Keywords: Optimal policy; Consistent policy; Institutional design (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2009-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published in Scottish Journal of Political Economy

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http://web.unlv.edu/projects/RePEc/pdf/0909.pdf First version, 2008 (application/pdf)
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Journal Article: THE OPTIMALITY AND CONTROLLABILITY OF MONETARY POLICY THROUGH DELEGATION WITH CONSISTENT TARGETS (2011) Downloads
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