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Central Bank Reputation and Conservativeness

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  • Haizhou Huang
  • Michele Fratianni

Abstract

In a monetary game played by he private sector and a central banks (CB), who has private information, reputation may not completely solver the CB time inconsistency problem. An alternative solution is CB Conservativeness. The optimal degree of CB Conservativeness is solved in both the reputatuional and non-reputational regime and reputatuion 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 wy low-reputation CBs find it worthwhile to peg the exchange rate to the currency of a high-reputation CB and why a gighly reputable CB, like the Bundesbank, can afford to miss monetary targets more often than a less reputable CB.

Suggested Citation

  • Haizhou Huang & Michele Fratianni, 1995. "Central Bank Reputation and Conservativeness," FMG Discussion Papers dp216, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp216
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp216.pdf
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    Cited by:

    1. Eijffinger, S.C.W. & Hoeberichts, M.M. & Schaling, E., 1995. "Optimal conservativeness in the Rogoff (1985) model : A graphical and closed-form solution," Other publications TiSEM c0088be4-00da-4fea-8ab5-e, Tilburg University, School of Economics and Management.
    2. Thierry Warin, 2006. "A Note on Post-Modern Monetary Policy," Middlebury College Working Paper Series 0617, Middlebury College, Department of Economics.
    3. Eijffinger, Sylvester C W & Hoeberichts, Marco, 1998. "The Trade off between Central Bank Independence and Conservativeness," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 397-411, July.
    4. Thierry Warin, 2005. "Monetary Policy: From Theory to Practices," Middlebury College Working Paper Series 0508, Middlebury College, Department of Economics.

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