Inflation targeting as a way of pre-commitment
Oxford Economic Papers, 50, (3), .
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This paper considers an institutional arrangement in which the government assigns a publicly-announced inflation target to an instrument-independent central bank, but retains the discretion to revise the inflation target after wages have been set. We argue that since this arrangement is transparent, it solves Canzonen's private information problem, ensures perfect monitoring of the government, and makes reputauonal forces more effective Cases are characterized in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy.
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