The inconsistency of optimal policy comes from inconsistency between the social loss function and the economic structure. Accordingly, this paper designs a central bank loss function, which proves consistent with the economic structure. Under the designed central bank loss function discretionary...

Distortions introduced by targeting nominal income growth, or an exchange rate peg, in the trade-off between inflation and output in the stabilization of shocks to supply and terms of trade cannot be eliminated simultaneously. If supply shocks are optimally stabilized, targeting an exchange rate...

Central banks often make announcements even though, in models in which dynamic time inconsistency of optimal policy plays a role, they have an incentive to lie. This paper studies the way inflation targeting affects the incentives the central bank faces in announcing its target inflation rate...

Central banks often make announcements even though, in models in which dynamic time inconsistency of optimal policy plays a role, they have an incentive to lie. This paper studies the way inflation targeting affects the incentives the central bank faces in announcing its target inflation rate...