Optimal reputation building in the New Keynesian model
Lu, Y. K.
King, R. G.
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Citation (published version)Y. K. Lu, R. G. King, E. Pasten. 2016. "Optimal reputation building in the New Keynesian model." Journal of Monetary Economics, Volume 84, pp. 233 - 249. https://doi.org/10.1016/j.jmoneco.2016.10.010
We study the optimal committed monetary policy when the private sector has imperfect information and has to infer the central banker׳s ability to commit. The optimal policy is designed to influence learning and improve the central banker׳s reputation of being committed. The reputation building implies that when a committed central banker first takes office, he should resist the temptation to stimulate output with initially high but declining inflation; he should reverse a missed inflation target rather than accommodate it; and he should adopt a less accommodative inflation response to a cost-push shock than a full commitment solution suggests.
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