37 research outputs found
Does the Time Inconsistency Problem Make Flexible Exchange Rates Look Worse than You Think?
Of Nutters and Doves
Under a large degree of extrinsic inflation persistence, there is a strong yet simple case for inflation targeting even if we are uncertain about many other dimensions of the economy. If inflation persistence is high and driven by extrinsic sources, even an excessively strict inflation-targeting regime is preferable to full policy discretion. Our result is entirely built on stabilization policy: long-run inflation rates are optimal under full policy discretion in our model. It is instead the medium-term dynamics of inflation expectations that render the policy response under discretion worse than inaction.
Does the Time Inconsistency Problem Make Flexible Exchange Rates Look Worse Than You Think?
NOMINAL GDP TARGETING AND CENTRAL BANK CONSERVATIVENESS
In the literature on monetary economics, there is the āinflationary biasā result which predicts that the rate of inflation will be biased towards a higher level under discretionary monetary policy than under a ruleābased policy regime. It is established that a credible nominal target can eliminate this āinflationary biasā. In this paper, we examine the case of nominal GDP targeting, which is a ruleābased monetary regime. Depending on the degree of conservativeness by the central bank, we show in a stylized model the choice of different combination of inflation and real GDP targets can still result in an āinflationary biasā, and there also exists the possibility of a ādisāinflationary biasā