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Conservative central banks: how conservative should a central bank be?
Author(s) -
Hughes Hallett Andrew,
Proske Lorian D.
Publication year - 2018
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/sjpe.12149
Subject(s) - output gap , economics , volatility (finance) , conservatism , central bank , monetary economics , inflation targeting , inflation (cosmology) , monetary policy , macroeconomics , econometrics , physics , politics , theoretical physics , political science , law
Using Rogoff's, 1985 model, we determine how inflation averse a central banker should be, given the level of volatility and projected output gap in the economy. We confirm a strong degree of conservatism, almost twice what society would have chosen. But, for a range of developing countries and the OECD, economies that systematically experience higher levels of output volatility would do best to hire a central banker who is more inflation averse than society, but less so than in stable developed economies. Thus, while a conservative central banker remains desirable, the trade‐off is with output volatility rather than with the output gap itself.

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