publication . Other literature type . Article . 1985

The Optimal Degree of Commitment to an Intermediate Monetary Target

Kenneth Rogoff;
Open Access
  • Published: 01 Nov 1985
  • Publisher: Oxford University Press (OUP)
Abstract
Society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places "too large" a weight on inflation-rate stabilization relative to employment stabilization. Although having such an agent head the central bank reduces the time-consistent rate of inflation, it suboptimally raises the variance of employment when supply shocks are large. Using an envelope theorem, we show that the ideal agent places a large, but finite, weight on inflation. The analysis also provides a new framework for choosing among alternative intermediate monetary targets.
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