DP4247 Monetary Policy and Lexicographic Preference Ordering

Author(s):	John Driffill, Zeno Rotondi
Publication Date:	February 2004
Keyword(s):	european central bank, lexicographic preferences, monetary policy, time inconsistency
JEL(s):	E52, E58
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=4247

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.