Mechanisms for Achieving Monetary Stability: Inflation Targeting Versus the Erm
JOURNAL OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 4, February 1997
Posted: 30 Sep 1996
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Mechanisms for Achieving Monetary Stability: Inflation Targeting Versus the Erm
Abstract
First, we modify the Barro-Gordon model so that a credibility-stabilization tradeoff will remain, even when a performance contract of the type envisaged by Walsh (1995) is imposed on the central bank governor. We do this by modeling a real interest rate bias along with the inflation bias. Then, we discuss how various inflation penalties might actually be imposed on a central bank, and ask whether "inflation targeting" supported by one or another of the penalties) is likely to bring a better resolution to the credibility-stabilization tradeoff than the ERM.
JEL Classification: E58, E52, E61
Suggested Citation: Suggested Citation