The central bank cost constraint and output-inflation variability: A note on Cecchetti and Ehrmann 2000

Osama Sweidan, Fadwa Kalaji

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

The goal of this paper is to extend the model of Cecchetti and Ehrmann 2000 to study the case of developing countries that have a constraint in conducting their monetary policies. Contrary to Cecchetti and Ehrmann 2000 model, our model shows that the existence of such a constraint i.e. cost restriction allows the aggregate demand shock to affect the output-inflation variability. Our model also shows that adding a monetary policy cost restriction to the central bank loss function leads to either a steeper or flatter efficient frontier. This implies that the effect of monetary policy to offset aggregate demand and supply shocks is reduced.

Original languageEnglish
JournalEconomics Bulletin
Volume5
Issue number1
Publication statusPublished - Dec 1 2005
Externally publishedYes

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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