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Announcements, Inflation Targeting and Central Bank Incentives
Author(s) -
Walsh Carl E.
Publication year - 1999
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00168
Subject(s) - credibility , central bank , inflation targeting , inflation (cosmology) , incentive , monetary policy , monetary economics , distortion (music) , economics , private information retrieval , forward guidance , business , market economy , credit channel , physics , theoretical physics , amplifier , statistics , mathematics , cmos , electronic engineering , political science , law , engineering
This paper studies the incentives a central bank faces in announcing inflation targets when the central bank has private information about the economy and the public is uncertain about the central bank’s preferences. Targeting rules in the absence of announcements reduce the inflationary bias of discretionary policy, but they distort the central bank’s response to private information about the economy. This distortion is eliminated when the central bank is allowed to announce the inflation target. Announcements also affect credibility, although the way they do so depends on the exact definition of credibility that is employed.