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Inflation contract, central bank transparency and model uncertainty

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  • Dai, Meixing
  • Spyromitros, Eleftherios

Abstract

Using a New-Keynesian model subject to misspecifications, we examine how the robust monetary policy could be modified by a linear inflation contract when a central bank is opaque about its preference for model robustness. It is shown that a central bank must limit this preference and opacity about it to ensure the dynamic stability of the economy. An optimal inflation contract with a zero penalty rate provides no incentive for a central bank to be opaque. The latter must rebalance the benefit of avoiding very bad outcomes in worst case scenarios and the economic costs due to higher macroeconomic volatility.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 6 ()
Pages: 2371-2381

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2371-2381

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Inflation contract; Model uncertainty; Model robustness; Robust monetary policy; Central bank transparency (opacity);

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References

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Citations

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Cited by:
  1. Papadamou, Stephanos, 2013. "Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates," Economic Modelling, Elsevier, vol. 33(C), pages 545-551.
  2. Meixing Dai & Eleftherios Spyromitros, 2010. "Accountability And Transparency About Central Bank Preferences For Model Robustness," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(2), pages 212-237, 05.

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