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Why Inflation Targeting may Partly Substitute for Explicit Precommitment

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  • Herrondorf, Berthold

Abstract

This paper considers an institutional arrangement, in which the government assigns a publicly announced inflation target to an instrument independent central bank, but retains the discretion to revise the target after wages have been set. We argue that since this arrangement is perfectly transparent, it resolves Canzoneri's private information problem, ensures perfect monitoring of the government, and enhances the effectiveness of reputational forces. The paper characterizes cases in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy.

Suggested Citation

  • Herrondorf, Berthold, 1996. "Why Inflation Targeting may Partly Substitute for Explicit Precommitment," The Warwick Economics Research Paper Series (TWERPS) 451, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:451
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/1995-1998/twerp451.pdf
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    More about this item

    Keywords

    Central Bank Independence ; Inflation Targeting ; Private Information ; Reputation ; Transparency;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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