Quarterly Journal of Economics Vol. 100 No. 4 1985
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.
- DOI
- 10.2307/1885679
- Volume
- 100
- Issue
- 4
- Pages
- 1169
- Sources
- crossref openalex