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Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux

Stephen Miller () and Huiping Yuan ()

No 2005-55, Working papers from University of Connecticut, Department of Economics

Abstract: Kydland and Prescott (1977) consider the issue of the time-inconsistency of optimal policy and its source. Our paper provides additional insight on this issue. They develop a simple model of monetary policy making, where the central bank needs some commitment technique to achieve optimal monetary policy over time. Although not their main focus, they illustrate the difference between consistent and optimal policy in a sequential-decision one-period world. In our solution, the government appoints a central bank or delegates to the central bank an objective function that differs from the social welfare function. The central bank's welfare function causes the consistent policy implemented by the central bank to prove optimal for society. The optimal institutional design for the Kydland-Prescott sequential-decision one-period model requires the appointment or delegation to a completely conservative central banker.

JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
Date: 2005-12, Revised 2009-01
Note: This paper previously circulated under the title "Consistent Targets and Optimal Monetary Policy: A Note". We presented an earlier version at Federal Reserve Bank of Boston.
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Published in International Journal of Business and Economics, April 2010, with the title "Designing Central Bank Loss Functions."

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