Skip navigation
Skip navigation

Dealing with Time-Inconsistency: Inflation Targeting vs. Exchange Rate Targeting

Davis, J. Scott; Fujiwara, Ippei; Wang, Jiao

Description

Abandoning an objective function with multiple targets and adopting single mandate can be an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on an economy’s level of trade openness and the credibility of the central bank. We begin with reduced form empirical results which show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially, the...[Show more]

dc.contributor.authorDavis, J. Scott
dc.contributor.authorFujiwara, Ippei
dc.contributor.authorWang, Jiao
dc.date.accessioned2019-07-16T04:49:17Z
dc.date.available2019-07-16T04:49:17Z
dc.identifier.issn0022-2879
dc.identifier.urihttp://hdl.handle.net/1885/164603
dc.description.abstractAbandoning an objective function with multiple targets and adopting single mandate can be an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on an economy’s level of trade openness and the credibility of the central bank. We begin with reduced form empirical results which show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially, the tendency to peg depends on trade openness. Then in a model where the central bank displays “loose commitment” we show that as central bank credibility falls, they are more likely to adopt either an inflation target or a pegged exchange rate. A relatively closed economy would adopt an inflation target to overcome the time-inconsistency problem, but a highly open economy would prefer an exchange rate peg.
dc.description.sponsorshipFujiwara gratefully acknowledges financial support from JSPS KAKENHI Grant-in-Aid for Scientific Research (A) Grant Number 15H01939. Wang is grateful for financial support from Australian Research Council Discovery Project 160102654
dc.format.mimetypeapplication/pdf
dc.language.isoen_AU
dc.publisherOhio State University Press
dc.rights© 2018 The Ohio State University
dc.sourceJournal of Money, Credit and Banking
dc.source.urihttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3028391
dc.subjectTime-inconsistency
dc.subjectCommitment
dc.subjectInflation target
dc.subjectExchange rate peg
dc.subjectTie-one’s-hands
dc.titleDealing with Time-Inconsistency: Inflation Targeting vs. Exchange Rate Targeting
dc.typeJournal article
local.description.notesImported from ARIES
local.identifier.citationvolume50
dcterms.dateAccepted2018-03-21
dc.date.issued2018-09-09
local.identifier.absfor140207 - Financial Economics
local.identifier.ariespublicationU1061771xPUB82
local.publisher.urlhttps://onlinelibrary.wiley.com
local.type.statusSubmitted Version
local.contributor.affiliationDavis, J. Scott, Federal Reserve Banks
local.contributor.affiliationFujiwara, Ippei, College of Asia and the Pacific, ANU
local.contributor.affiliationWang, Jiao, University of Melbourne
dc.relationhttp://purl.org/au-research/grants/arc/DP160102654
local.bibliographicCitation.issue7
local.bibliographicCitation.startpage1369
local.bibliographicCitation.lastpage1399
local.identifier.doi10.1111/jmcb.12551
dc.date.updated2019-03-31T07:20:09Z
dcterms.accessRightsOpen Access
dc.provenanceThis is the pre-peer reviewed version of the following article "Dealing with Time Inconsistency: Inflation Targeting versus Exchange Rate Targeting" J. Scott Davis, Ippei Fujiwara, Jiao Wang, which has been published in final form at https://doi.org/10.1111/jmcb.12551. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
CollectionsANU Research Publications

Download

File Description SizeFormat Image
01_Davis_Dealing_with_2018.pdf355.21 kBAdobe PDFThumbnail


Items in Open Research are protected by copyright, with all rights reserved, unless otherwise indicated.

Updated:  22 January 2019/ Responsible Officer:  University Librarian/ Page Contact:  Library Systems & Web Coordinator