Working Paper: CEPR ID: DP1348
Authors: Ben Lockwood
Abstract: This paper shows that the government can achieve its precommitment outcome in monetary policy when output follows an autoregressive process, by offering the central banker a linear inflation contract, and where the parameters of the contract depend on lagged output. This note therefore offers an extension of the recent results of Walsh to the case of persistence in real economic variables such as output or unemployment
Keywords: monetary policy; inflation contracts; output persistence
JEL Codes: E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| linear inflation contract contingent on lagged output (E31) | precommitment outcome (D70) |
| output persistence (C67) | effectiveness of the inflation contract (E31) |
| inflation penalty during recessions (E31) | interaction effect based on economic conditions (F69) |
| theoretical model (C20) | generalizes Walsh's earlier work (B13) |