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|
|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.