Robust Monetary Policy Under Uncertainty About Central Bank Preferences
University of Strasbourg - Bureau of Economic Theory and Application (BETA)
French National Center for Scientific Research (CNRS) - Bureau of Economic Theory and Application (BETA)
Bulletin of Economic Research, Vol. 62, Issue 2, pp. 197-208, April 2010
In this paper, we study the impact of central bank opacity on macroeconomic performances in a new Keynesian framework with model uncertainty using robust control techniques. We identify a new source of central bank opacity, which refers to the lack of information about the central bank's preference for robustness in the sense of Hansen and Sargent. We find closed-form solutions for the robust control problem, analysing the impact of the lack of transparency about the central bank's preferences for robustness. We show that an increased transparency about the central bank's preference for robustness makes monetary policy respond less aggressively to cost-push shocks, thus reducing the inflation and output gap variability. As a consequence, inflation and output gap are less volatile than under central bank opacity about its preference for robustness.
Number of Pages in PDF File: 12Accepted Paper Series
Date posted: March 22, 2010
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