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Heterogeneity of Central Bankers and Inflationary Pressure
Código: WPE – 075
Fabia A. de Carvalho
This paper builds a game theoretic model to investigate credibility in monetary policy when inflation targets are not set by the monetary authority and there is uncertainty about the preferences of the central banker. Under reasonable assumptions, the model shows that in countries with greater dispersion in central bankers’ preferences, as it is the case in a number of developing nations, strong-type central bankers have to be more conservative to persuade society of their commitment to controlling inflation. The model also shows that inflation targets have a role in anchoring expectations even when the central banker highly values output expansions.