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| Osama Sweidan and Fadwa Kalaji |
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| ''The central bank cost constraint and output-inflation variability: a note on Cecchetti and Ehrmann 2000'' |
| ( 2005, Vol. 5 No.12 ) |
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| 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. |
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| Keywords: Central bank losses |
JEL:
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General |
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| Manuscript Received : Nov 28 2005 | | Manuscript Accepted : Nov 29 2005 |
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