Monetary Policy and Lexicographic Preference Ordering
22 Pages Posted: 5 Mar 2004
Date Written: February 2004
Abstract
In this Paper, we argue that the objectives given to the European Central Bank in the Maastricht Treaty are not well represented by the widely used weighted sum of squared deviations of inflation and output from target (plus possibly terms in squared changes in interest rates to pick up interest rate smoothing). Instead, the stated lexicographic ordering should be taken at face value and its implications explored fully. We set out a number of models that do this, and comment on their implications.
Keywords: Monetary policy, time inconsistency, lexicographic preferences, European central bank
JEL Classification: E52, E58
Suggested Citation: Suggested Citation
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