The Macroeconomic Effects of External Pressures on Monetary Policy

42 Pages Posted: 13 Aug 2008

See all articles by Davide Debortoli

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: July 13, 2007

Abstract

Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt "more liberal" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even "more conservative" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt "more liberal" objectives may be aiming. We also discuss the opposite case, where objectives may become "more conservative" in the future, which may be the relevant case for countries considering the adoption of inflation targeting.

Keywords: Monetary Policy, Time-Consistency, Political Disagreement

JEL Classification: E52, E58, E61

Suggested Citation

Debortoli, Davide and Nunes, Ricardo Cavaco, The Macroeconomic Effects of External Pressures on Monetary Policy (July 13, 2007). Available at SSRN: https://ssrn.com/abstract=1222763 or http://dx.doi.org/10.2139/ssrn.1222763

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Ricardo Cavaco Nunes (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
56
Abstract Views
512
rank
426,724
PlumX Metrics