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Chapter 25: Q.21 (page 676)

What traits characterize a “conservative” central banker?

Short Answer

Expert verified

Committed to maintaining low and steady inflation is the trait of conservative central banker.

Step by step solution

01

Content Introduction

The stability bias of discretionary monetary policy is solved by a conservative central banker who places more emphasis on inflation stabilization than the social planner. The welfare costs of departing from the ideal level of monetary conservatism are asymmetric, as shown in this note.

02

Content Explanation

A central banker who is conservative is someone who has a great hatred for inflation. In other words, a conservative central banker would be appointed to project a strong anti-inflation stance and be devoted to maintaining low and stable inflation.

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Most popular questions from this chapter

Central banks that engage in inflation targeting usually announce the inflation target and time period for which that target will be relevant. In addition, central bank officials are held accountable for their actions (e.g., they could be fired if the target is not reached), and their success or lack thereof is also public information. Explain why transparency is such a fundamental ingredient of inflation targeting.

Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Federal Reserve increases the federal funds rate. Assume the Federal Reserve is considering an increase in the federal funds rate target to fight inflation and promote a low inflation environment that will encourage investment and economic growth.

a. Discuss the implications of the econometric model’s predictions if individuals interpret the increase in the federal funds rate target as a sign that the Fed will keep inflation at low levels in the long run.

b. What would be Lucas’s critique of this model?

How can the establishment of an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?

Robert Lucas won the Nobel Prize in economics. Go to http:/nobelprize.org/nobel_prizes/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for? When was it awarded?

Suppose the statistical office of a country does a poor job in measuring inflation and reports an annualized inflation rate of 4%for a few months, while the true inflation rate has been 2.5%. What will happen to the central bank's credibility if it is engaged in inflation targeting and its target is around 2%?
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