The central bank cost constraint and output-inflation variability: a note on Cecchetti and Ehrmann 2000 Osama Sweidan Fadwa Kalaji Assistant Professor of Economics Assistant Professor of Economics 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. Citation: Sweidan, Osama and Fadwa Kalaji, (2005) "The central bank cost constraint and output-inflation variability: a note on Cecchetti and Ehrmann 2000." Economics Bulletin, Vol. 5, No. 12 pp. 1-6 Submitted: August 1, 2005. Accepted: November 29, 2005. URL: http://www.economicsbulletin.com/2005/volume5/EB-05E00010A.pdf