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| Author: | Lengwiler, Y. Orphanides, A. |
| Title: | Optimal discretion |
| Journal: | Scandinavian Journal of Economics
2002 : JUN, VOL. 104:2, p. 261-276 |
| Index terms: | Inflation Central banks Markets Monetary policy Monetary theory Models |
| Freeterms: | Credibility |
| Language: | eng |
| Abstract: | This paper investigates the desirability of adopting a rule in favour of discretionary monetary policy in a model exhibiting Kydland and Prescott's dynamic inconsistency problem but no fundamental incompatibility btw. the policymaker's price stability and full employment objectives. It is shown that if discretion provides a policy flexibility benefit, then a rule is optimal only when inflation exceeds an endogenously determined threshold. |
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