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Policy Maker’s Credibility with Predetermined Instruments for Forward-looking Targets

Abstract : The aim of the present paper is to provide criteria for a central bank of how to chooseamong different monetary-policy rules when caring about a number of policy targetssuch as the output gap and expected inflation. Special attention is given to the questionif policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, theforward-looking case implies an extreme lack of robustness and of credibility of stabi-lization policy. The backward-looking case is such that the simple-rule parameters canbe the solution of Ramsey optimal policy under limited commitment. As a conse-quence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumptionleading to policy advice that is neither robust nor credible.
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https://halshs.archives-ouvertes.fr/halshs-03029893
Contributor : Caroline Bauer <>
Submitted on : Sunday, November 29, 2020 - 2:40:34 PM
Last modification on : Tuesday, January 19, 2021 - 11:09:09 AM

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  • HAL Id : halshs-03029893, version 1

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Jean-Bernard Chatelain, Kirsten Ralf. Policy Maker’s Credibility with Predetermined Instruments for Forward-looking Targets. Revue d'Economie Politique, Dalloz, 2020, 130 (5), pp.823-846. ⟨halshs-03029893⟩

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