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Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique

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  • Eijffinger, Sylvester C W
  • Hoeberichts, Marco
  • Schaling, Eric

Abstract

This paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation. Monetary policy uncertainty is modeled as a shock to the central banker’s preference for inflation stabilization relative to output stabilization that cannot be observed by the public. We find that the mean and variance of inflation increase with the variance of this preference shock. However, unlike other studies, we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society’s welfare.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 32 (2000)
Issue (Month): 2 (May)
Pages: 218-35

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Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:2:p:218-35

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Marvin Goodfriend, 1985. "Monetary mystique : secrecy and central banking," Working Paper 85-07, Federal Reserve Bank of Richmond.
  2. Garfinkel, Michelle R. & Oh, Seonghwan, 1995. "When and how much to talk credibility and flexibility in monetary policy with private information," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 341-357, April.
  3. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  4. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  5. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, vol. 37(4), pages 377-381, December.
  6. Lewis, Karen K, 1991. "Why Doesn't Society Minimize Central Bank Secrecy?," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 403-15, July.
  7. Manfred Neumann, 1991. "Precommitment by central bank independence," Open Economies Review, Springer, vol. 2(2), pages 95-112, June.
  8. 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.
  9. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
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