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What is the Central Banks Game?

Author

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  • Charles Goodhart
  • Haizhou Huang

Abstract

In this papaer we, first, by explicitly taking account of the private sectors influence and pressure on the monetary authorities, provide a more plausible representation of the motivations of the two main players. We then incorporate persistence into the model and show that the optimal policy of the authorities will be state dependent. Finally and most importantly, we highlight an inconsistency between two strands in the literature of monetary analysis, namely the long lags of monetary policy and the time inconsistency. Such a lag of monetary policy means that the policy will be transparently observed before it affects the economy, consequently the Central Bank cannot fool anybody who has not already bound herself into a contract longer than the lag. Even if such contracts are pervasive, the inflationary bias arising from time inconsistency much be must smaller than previously assessed.

Suggested Citation

  • Charles Goodhart & Haizhou Huang, 1995. "What is the Central Banks Game?," FMG Discussion Papers dp222, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp222
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp222.pdf
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    Cited by:

    1. Sousa, Pedro A. B. de, 2001. "Independent and Accountable Central Banks and the European Central Bank," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 5, July.
    2. Remsperger, Hermann & Worms, Andreas, 1999. "Transparency in monetary policy," CFS Working Paper Series 1999/16, Center for Financial Studies (CFS).
    3. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 497-520, April.
    4. R. Rovelli & M. Polo & H. Gottinger & D. Encaoua & M. Galeotti & W. Lachmann & S. Bremer, 1997. "Book reviews," Journal of Economics, Springer, vol. 65(1), pages 103-121, February.
    5. Runchana Pongsaparn, 2005. "The Theory of Monetary Policy: A Review," Working Papers 2005-08, Monetary Policy Group, Bank of Thailand.
    6. Claude Diebolt & Antoine Parent, 2006. "Were there Anomalies in the Sterling-Franc Exchange Rate Regulation during the Mid-19th Century?," Working Papers 06-08, Association Française de Cliométrie (AFC).

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