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SHOULD CENTRAL BANKS CARE ABOUT REGIONAL IMBALANCES?
Author(s) -
Røisland Øistein
Publication year - 2005
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.0036-9292.2005.00343.x
Subject(s) - economics , inflation (cosmology) , monetary policy , monetary economics , central bank , inflation targeting , outcome (game theory) , macroeconomics , function (biology) , global imbalances , international economics , current account , exchange rate , microeconomics , physics , evolutionary biology , theoretical physics , biology
Regional imbalances may arise both as a result of asymmetric shocks and of divergent responses to symmetric shocks, such as monetary policy shocks. This paper analyses flexible inflation targeting when regional imbalances are included in the loss function. By adding regional imbalances, the time‐inconsistency problem in monetary policy becomes more complex. The paper analyses alternative institutional arrangements designed to improve the discretionary equilibrium. Even in the absence of an over‐ambitious output target, it is shown that the outcome of monetary policy is improved if the central bank places less weight on regional imbalances than the political authorities.