Rules versus Discretion - A Disinflation Case

20/02/2003 |  Frish Roni, Klein Nir
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Monetary Policy and Inflation

Rules versus Discretion - A Disinflation Case
Roni Frish and Nir Klein

Abstract

This paper compares a strict inflation target regime and a conservative central bank regime in order to determine the monetary regime appropriate for a disinflation process. The analysis shows that in a two-period model, in which policymakers face given first period inflationary expectations, a strict inflation target could be preferred to the appointment of a conservative central banker who acts in a discretionary manner. The result differs from that of Roggof (1985), who assumed rational expectations and concluded that a conservative central banker is always preferred. The disadvantage of the conservative central banker derived from its tendency to accelerate the disinflation process compared to the desired rate from the social welfare point of view.

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