Premium
Designing Monetary Policy when Unemployment Persists
Author(s) -
Lockwood Ben,
Miller Marcus,
Zhang Lei
Publication year - 1998
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00132
Subject(s) - economics , delegation , delegate , unemployment , incentive , monetary policy , inflation (cosmology) , precommitment , government (linguistics) , discretion , monetary economics , phillips curve , empirical evidence , keynesian economics , macroeconomics , labour economics , microeconomics , linguistics , philosophy , physics , management , epistemology , theoretical physics , computer science , law , political science , programming language
This paper investigates how unemployment persistence affects the optimal delegation of monetary policy to an independent central banker (CB). Two opposing forces are shown to be at work: with more persistence, the government’s incentive to stabilize the economy is greater; but (if the CB is forward‐looking) its incentive to create inflation surprises is also greater. We show that, owing to the second effect, the government may wish not to delegate at all, unlike the case where there is no persistence. In the event that the government does delegate, the paper identifies conditions under which either effect dominates in the government’s choice of conservatism of the CB. We compare delegation to discretion and precommitment, using a diagrammatic approach that may be of independent interest. We also present some preliminary empirical evidence on the cross‐country relationship between unemployment persistence and inflation that appears consistent with the model’s predictions.