Central Bank Reputation and Conservativeness

Posted: 15 Jun 1999

See all articles by Michele U. Fratianni

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Haizhou Huang

International Monetary Fund (IMF)

Date Written: November 1998

Abstract

In a monetary game played by the private sector and a central bank (CB), who has private information, reputation may not completely solve the CB time inconsistency problem. An alternative solution is CB conservativeness. The optimal degree of CB conservativeness is solved in both the reputational and non-reputational regime, and reputation is proved to be a substitute for conservativeness. Unless reputation works perfectly, the public can always gain from a conservative CB. Our model offers a unified framework to analyze both CB reputation and conservativeness. Our result can explain why low-reputation CBs find it worthwhile to peg the exchange rate to the currency of a high-reputation CB and why a highly reputable CB, like the Bundesbank, can afford to miss monetary targets more often than a less reputable CB.

JEL Classification: E58, E52, L16

Suggested Citation

Fratianni, Michele and Huang, Haizhou, Central Bank Reputation and Conservativeness (November 1998). Available at SSRN: https://ssrn.com/abstract=158971

Michele Fratianni (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

Haizhou Huang

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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