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The Optimal Degree of Commitment to an Intermediate Monetary Target

The Optimal Degree of Commitment to an Intermediate Monetary Target Abstract Society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places “too large” a weight on inflation-rate stabilization relative to employment stabilization. Although having such an agent head the central bank reduces the time-consistent rate of inflation, it suboptimally raises the variance of employment when supply shocks are large. Using an envelope theorem, we show that the ideal agent places a large, but finite, weight on inflation. The analysis also provides a new framework for choosing among alternative intermediate monetary targets. * I am indebted to Matthew Canzoneri, David Folkerts-Landau, Maurice Obstfeld, Michael Parkin, Alessandro Penati, Franco Spinelli, Lawrence Summers, Clifford Wymer, and to three anonymous referees for helpful comments on an earlier draft. This content is only available as a PDF. © 1985 by the President and Fellows of Harvard College http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Quarterly Journal of Economics Oxford University Press

The Optimal Degree of Commitment to an Intermediate Monetary Target

The Quarterly Journal of Economics , Volume 100 (4) – Nov 1, 1985

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References (17)

Publisher
Oxford University Press
Copyright
© 1985 by the President and Fellows of Harvard College
ISSN
0033-5533
eISSN
1531-4650
DOI
10.2307/1885679
Publisher site
See Article on Publisher Site

Abstract

Abstract Society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places “too large” a weight on inflation-rate stabilization relative to employment stabilization. Although having such an agent head the central bank reduces the time-consistent rate of inflation, it suboptimally raises the variance of employment when supply shocks are large. Using an envelope theorem, we show that the ideal agent places a large, but finite, weight on inflation. The analysis also provides a new framework for choosing among alternative intermediate monetary targets. * I am indebted to Matthew Canzoneri, David Folkerts-Landau, Maurice Obstfeld, Michael Parkin, Alessandro Penati, Franco Spinelli, Lawrence Summers, Clifford Wymer, and to three anonymous referees for helpful comments on an earlier draft. This content is only available as a PDF. © 1985 by the President and Fellows of Harvard College

Journal

The Quarterly Journal of EconomicsOxford University Press

Published: Nov 1, 1985

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