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Monetary Uncertainty, the Appropriate Choice of Central Banker and Social Welfare

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  • P Lawler
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    Abstract

    A number of papers have identified the possibility that less precise monetary control or, alternatively, increased uncertainty with regards to the effects of monetary policy on the economy may enhance social welfare. The present paper introduces monetary uncertainty into a model of monetary policy delegation. It is shown that an increase in uncertainty has an ambiguous effect on the appropriate degree of conservatism of an optimally chosen central banker, but produces an unambiguous fall in welfare.

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    Bibliographic Info

    Article provided by Economic Issues in its journal Economic Issues.

    Volume (Year): 9 (2004)
    Issue (Month): 2 (September)
    Pages: 43-50

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    Handle: RePEc:eis:articl:204lawler

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    Web page: http://www.economicissues.org.uk
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    1. Swank, Otto H, 1994. " Better Monetary Control May Increase the Inflationary Bias of Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 125-31.
    2. Devereux, Michael, 1989. "A Positive Theory of Inflation and Inflation Variance," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 105-16, January.
    3. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
    4. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March.
    5. Herrendorf, Berthold & Lockwood, Ben, 1996. "Rogoff's 'Conservative' Central Banker Restored," CEPR Discussion Papers 1386, C.E.P.R. Discussion Papers.
    6. Devereux, Michael, 1987. "The effect of monetary variability on welfare in a simple macroeconomic model," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 427-435, May.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    8. Letterie, Wilko, 1997. " Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 463-70, September.
    9. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    10. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
    11. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    12. Lawler, Phillip, 2000. "Centralised Wage Setting, Inflation Contracts, and the Optimal Choice of Central Banker," Economic Journal, Royal Economic Society, vol. 110(463), pages 559-75, April.
    13. Ball, Laurence & Cecchetti, Stephen G, 1991. "Wage Indexation and Discretionary Monetary Policy," American Economic Review, American Economic Association, vol. 81(5), pages 1310-19, December.
    14. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    15. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
    16. Agell, Jonas & Ysander, Bengt-Christer, 1993. "Should Governments Learn to Live with Inflation? Comment," American Economic Review, American Economic Association, vol. 83(1), pages 305-11, March.
    17. Fukuda, Shin-Ichi, 1993. "Informational advantage, exogenous variability, and economic welfare: Can the informational advantage of the policymaker reduce welfare?," Journal of Macroeconomics, Elsevier, vol. 15(2), pages 349-363.
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