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

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