Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212066 
Year of Publication: 
2007
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 8/2007
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Monetary policy transmission lags create credibility problems for the inflationtargeting policy maker who acts under discretion. We show that if prices react to monetary policy with a longer lag than output, the welfare maximizing inflationtargeting policy implies no policy stabilization of cost-push shocks in the canonical New Keynesian model. The reason is simple: for the period monetary policy influences output, inflation is predetermined and the best discretionary policy is to stabilize the output gap fully. We find that money growth targeting comes close to replicating the welfare-maximizing policy under commitment if there are transmission lags.
Subjects: 
discretionary and stabilization bias
monetary policy
transmission lags
inflation targeting
money targeting
JEL: 
E52
E58
E61
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-363-6
Document Type: 
Working Paper

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