The Macroeconomic Effects of External Pressures on Monetary Policy

42 Pages Posted: 13 Aug 2008

See all articles by Davide Debortoli

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business; CREI; Barcelona School of Economics

Ricardo Nunes

University of Surrey; CIMS; CfM

Date Written: July 13, 2007

Abstract

Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt "more liberal" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even "more conservative" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt "more liberal" objectives may be aiming. We also discuss the opposite case, where objectives may become "more conservative" in the future, which may be the relevant case for countries considering the adoption of inflation targeting.

Keywords: Monetary Policy, Time-Consistency, Political Disagreement

JEL Classification: E52, E58, E61

Suggested Citation

Debortoli, Davide and Nunes, Ricardo, The Macroeconomic Effects of External Pressures on Monetary Policy (July 13, 2007). Available at SSRN: https://ssrn.com/abstract=1222763 or http://dx.doi.org/10.2139/ssrn.1222763

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona School of Economics ( email )

Carrer de Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Ricardo Nunes (Contact Author)

University of Surrey ( email )

Stag Hill
University Campus
Guildford, GU2 7XH
United Kingdom

CIMS ( email )

Guildford

CfM ( email )

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
73
Abstract Views
648
Rank
580,987
PlumX Metrics