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Title: Monetary Policy and Lexicographic Preference Ordering

Author(s): John Driffill and Zeno Rotondi

Publication Date: February 2004

Keyword(s): european central bank, lexicographic preferences, monetary policy and time inconsistency

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Driffill, J and Rotondi, Z. 2004. 'Monetary Policy and Lexicographic Preference Ordering'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4247