Title: Announcements, Inflation Targeting and Central Bank Incentives
Abstract: Central banks often make announcements even though, in models in which dynamic time inconsistency of optimal policy plays a role, they have an incentive to lie. This paper studies the way inflation targeting affects the incentives the central bank faces in announcing its target inflation rate when the central bank has private information about the state of the economy and the public is uncertain about the central bank's preferences. While inflation targeting in the absence of announcements reduces the inflation bias of discretion, it distorts the central bank's response to its private information. A key result of the paper is to show that this distortion is eliminated when the central bank is allowed to announce its own target for the inflation rate.
Publication Year: 2003
Publication Date: 2003-06-20
Language: en
Type: article
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