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The Optimal Degree of Commitment to an Intermediate Monetary Target

Kenneth Rogoff

University of Wisconsin–Madison

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 (4)

Pages

1169

Export

BibTeX

Sources

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