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Central bank reputation and conservativeness

Author

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  • Frantianni, Michele
  • Huang, Haizhou

Abstract

In a monetary game played by the private sector and a central banks (CB), who has private information, reputation may not completely solve the CB time inconsistency problem. An alternative solution is CB Conservativeness. The optimal degree of CB Conservativeness is solved in both the reputational and non-reputational regime and reputation is proved to be substitute for conservativeness. Unless reputation works perfectly, the public can always gain from a conservative CB. Our model offers a unified framework to analyze both CB reputation and conservativeness. Our result can explain why low-reputation CBs find it worthwhile to peg the exchange rate to the currency of a high-reputation CB and why a highly reputable CB, like the Bundesbank, can afford to miss monetary targets more often than a less reputable CB.

Suggested Citation

  • Frantianni, Michele & Huang, Haizhou, 1995. "Central bank reputation and conservativeness," LSE Research Online Documents on Economics 119178, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119178
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    File URL: http://eprints.lse.ac.uk/119178/
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    More about this item

    Keywords

    central banking; reputation; conservativeness; monetary game;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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