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Inflation-targeting central banks have only imperfect knowledge about the effect of policy decisions on inflation. An important source of uncertainty is the relationship between inflation and unemployment. This paper studies the optimal monetary policy in the presence of uncertainty about the natural unemployment rate, the short-run inflation-unemployment tradeoff and the degree of inflation persistence in a simple macroeconomic model, which incorporates rational learning by the central bank as well as private sector agents. Two conflicting motives drive the optimal policy. In the static version of the model, uncertainty provides a motive for the policymaker to move more cautiously than she would if she knew the true parameters. In the dynamic version, uncertainty also motivates an element of experimentation in policy. I find that the optimal policy that balances the cautionary and activist motives typically exhibits gradualism, that is, it still remains less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and in inflation close to target.
In this paper, we present a monetary policy game in which the central bank has a private forecast of supply and demand shocks. The public needs to form its inflationary expectations and can make use of central bank announcements. However, because of the credibility problem that the central bank faces, the public will not believe a precise announcement. By extending the arrangement proposed by Garfinkel and Oh (1995) to a model that includes private information about both demand and supply shocks, we investigate the feasibility of making imprecise credible announcements concerning the rate of inflation. Klassifikation:E52;E58
For some time now the buzzword 'transparency' has been bandied about in the media almost daily. For example, calls were made for greater transparency in the financial system in connection with developments in the Asian financial markets. But the call for greater transparency goes far beyond the financial markets. It is now regarded as a necessary part of "good governance" demanded of all economic policy makers. As the World Bank's chief economist Joseph Stiglitz put it: 'No one would dare say that they were against transparency (....): It would be like saying you were against motherhood or apple pie.' This paper focuses on transparency in monetary policy, in particular with respect to the European System of Central Bank.
This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial behavior on the part of the central bank may indeed be optimal, in the sense of minimizing a loss function that penalizes inflation variations, deviations of output from potential, and interest-rate variability. Sluggish adjustment characterizes an optimal policy commitment, even though no such inertia would be present in the case of a reputationless (Markovian) equilibrium under discretion. Optimal interest-rate feedback rules are also characterized, and shown to involve substantial positive coefficients on lagged interest rates. This provides a theoretical explanation for the numerical results obtained by Rotemberg and Woodford (1998) in their quantitative model of the U.S. economy.
Since 1990, a number of countries have adopted inflation targeting as their declared monetary strategy. Interpretations of the significance of this movement, however, have differed widely. To some, inflation targeting mandates the single-minded, rule-like pursuit of price stability without regard for other policy objectives; to others, inflation targeting represents nothing more than the latest version of cheap talk by central banks unable to sustain monetary commitments. Advocates of inflation targeting, including the adopting central banks themselves, have expressed the view that the efforts at transparency and communication in the inflation targeting framework grant the central bank greater short-run flexibility in pursuit of its long-run inflation goal. This paper assesses whether the talk that inflation targeting central banks engage in matters to central bank behavior, and which interpretation of the strategy is consistent with that assessment. We identify five distinct interpretations of inflation targeting, consistent with various strands of the current literature, and identify those interpretations as movements between various strategies in a conventional model of time-inconsistency in monetary policy. The empirical implications of these interpretations are then compared to the response of central banks to movements in inflation of three countries that adopted inflation targets in the early 1990s: The United Kingdom, Canada, and New Zealand. For all three, the evidence shows a break in the behavior of inflation consistent with a strengthened commitment to price stability. In no case, however, is there evidence that the strategy entails a single-minded pursuit of the inflation target. For the U.K., the results are consistent with the successful implementation the optimal state-contingent rule, thereby combining flexibility and credibility; similarly, New Zealand's improved inflation performance was achieved without a discernable increase in counter-inflationary conservatism. The results for Canada are less clear, perhaps reflecting the broader fiscal and international developments affecting the Canadian economy during this period.
No one seems to be neutral about the effects of EMU on the German economy. Roughly speaking, there are two camps: those who see the euro as the advent of a newly open, large, and efficient regime which will lead to improvements in European and in particular in German competitiveness; those who see the euro as a weakening of the German commitment to price stability. From a broader macroeconomic perspective, however, it is clear that EMU is unlikely to cause directly any meaningful change either for the better in Standort Deutschland or for the worse in the German price stability. There is ample evidence that changes in monetary regimes (so long as non leaving hyperinflation) induce little changes in real economic structures such as labor or financial markets. Regional asymmetries of the sorts in the EU do not tend to translate into monetary differences. Most importantly, there is no good reason to believe that the ECB will behave any differently than the Bundesbank.