Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts

Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an "inflation-target-conservative" central bank eliminates the inflation bia...

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Bibliographic Details
Published in:The American economic review 1997-03, Vol.87 (1), p.98-114
Main Author: Svensson, Lars E O
Format: Article
Language:English
Subjects:
Bias
Central banks
Conservatism
Economic models
Economic theory
Economics
Employment
Employment rates
Equilibrium
Federal Reserve Bank
Inflation
Inflation rate
Inflation rates
Interest rates
Monetary policy
Studies
Supply shocks
Unemployment
Working papers
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Summary:Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an "inflation-target-conservative" central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff "weight-conservative" central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment.
ISSN:0002-8282
1944-7981