Why Inflation Targeting may Partly Substitute for Explicit Precommitment

Berthold Herrondorf

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper considers an institutional arrangement, in which the government assigns a publicly announced inflation target to an instrument independent central bank, but retains the discretion to revise the target after wages have been set. We argue that since this arrangement is perfectly transparent, it resolves Canzoneri's private information problem, ensures perfect monitoring of the government, and enhances the effectiveness of reputational forces. The paper characterizes cases in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy.

Keywords: Central Bank Independence; Inflation Targeting; Private Information; Reputation; Transparency (search for similar items in EconPapers)
JEL-codes: E52 F33 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:451

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