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Optimal discretion

Lengwiler, Yvan and Orphanides, Athanasios. (2002) Optimal discretion. The Scandinavian journal of economics, Vol. 104, H. 2. S. 261-276.

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Official URL: http://edoc.unibas.ch/dok/A5253748

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Abstract

We investigate the desirability of adopting a rule in favor of discretionary monetary policy in a model exhibiting Kydland and Prescott's dynamic inconsistency problem but no fundamental incompatibility between the policymaker's price stability and full employment objectives. We show that if discretion provides a policy flexibility benefit, then a rule is optimal only when inflation exceeds an endogenously determined threshold. This gives rise to a discretionary policy zone for inflation with the central bank taking more drastic action towards stabilizing inflation when inflation veers outside the zone. Imperfect credibility narrows the scope for discretion and enhances the benefits of adopting a rule.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Finanzmärkte (Lengwiler)
UniBasel Contributors:Lengwiler, Yvan
Item Type:Article, refereed
Bibsysno:Link to catalogue
Publisher:University of Stockholm
ISSN:0347-0520
Note:Publication type according to Uni Basel Research Database: Journal article
Last Modified:22 Mar 2012 14:28
Deposited On:22 Mar 2012 14:03

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