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Should Central Banks Care About Regional Imbalances?

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  • Øistein Røisland

Abstract

Regional imbalances may arise both as a result of asymmetric shocks and of divergent responses to symmetric shocks, such as monetary policy shocks. This paper analyses flexible inflation targeting when regional imbalances are included in the loss function. By adding regional imbalances, the time‐inconsistency problem in monetary policy becomes more complex. The paper analyses alternative institutional arrangements designed to improve the discretionary equilibrium. Even in the absence of an over‐ambitious output target, it is shown that the outcome of monetary policy is improved if the central bank places less weight on regional imbalances than the political authorities.

Suggested Citation

  • Øistein Røisland, 2005. "Should Central Banks Care About Regional Imbalances?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(2), pages 242-260, May.
    • Handle: RePEc:bla:scotjp:v:52:y:2005:i:2:p:242-260
    DOI: 10.1111/j.0036-9292.2005.00343.x
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