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Competence Implies Credibility

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  • Giuseppe Moscarini

Abstract

The (reputation for) competence of a central bank at doing its job makes monetary policy under discretion credible and transparent. Based on its reading of the state of the economy, the central bank announces its policy intentions to the public in a cheap-talk game. The precision of its private signal measures its competence. The fineness of the equilibrium message space measures its credibility and transparency. This is increasing in the competence/inflation bias ratio: the public expects a competent central bank to use its discretion more to pursue its "objective" targets than to surprise expectations and stimulate output. (JEL E52, E58)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 37-63

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:37-63

Note: DOI: 10.1257/aer.97.1.37
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References

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  1. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August.
  2. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers 249, Board of Governors of the Federal Reserve System (U.S.).
  3. Lars E. O. Svensson, 2003. "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," NBER Working Papers 9421, National Bureau of Economic Research, Inc.
  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  5. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2004. "The optimal degree of discretion in monetary policy," International Finance Discussion Papers 801, Board of Governors of the Federal Reserve System (U.S.).
  6. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  7. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  8. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  9. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  10. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  11. Krishna, Vijay & Morgan, John, 2004. "The art of conversation: eliciting information from experts through multi-stage communication," Journal of Economic Theory, Elsevier, vol. 117(2), pages 147-179, August.
  12. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December.
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Cited by:
  1. Ricardo Reis, 2011. "When Should Policymakers Make Announcements?," 2011 Meeting Papers 122, Society for Economic Dynamics.
  2. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
  3. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 866 - 907.
  4. Vithessonthi, Chaiporn & Techarongrojwong, Yaowaluk, 2013. "Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand," Journal of Multinational Financial Management, Elsevier, vol. 23(5), pages 446-469.
  5. Vithessonthi, Chaiporn & Techarongrojwong, Yaowaluk, 2012. "The impact of monetary policy decisions on stock returns: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 487-507.
  6. Turdaliev, Nurlan, 2010. "Communication in repeated monetary policy games," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 228-243, April.
  7. Di Maggio, Marco, 2009. "Accountability and Cheap Talk," MPRA Paper 18652, University Library of Munich, Germany.

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