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Caution and Conservatism in the Making of Monetary Policy

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  • Schellekens, Philip
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    Abstract

    Does society benefit from the delegation of monetary policy to cautious and conservative central bankers? We offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences. First, caution improves credibility but does not obviate the need for central-bank conservatism. Second, previous models of delegation have focused on suboptimal forms of conservatism. We derive optimal concepts of conservatism that mitigate, or eliminate, any residual problem of credibility. Third, we rationalize why credible monetary policy may be conducive to stable inflation and output.

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    Bibliographic Info

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

    Volume (Year): 34 (2002)
    Issue (Month): 1 (February)
    Pages: 160-77

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    Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:1:p:160-77

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

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    Cited by:
    1. Giovanni Di Bartolomeo & Marco Manzo & Francesco Giuli, 2008. "Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness," Working Papers 0802, University of Crete, Department of Economics.
    2. Di Bartolomeo Giovanni & Giuli Francesco, 2009. "Fiscal and monetary interaction under monetary policy uncertainty," wp.comunite 0061, Department of Communication, University of Teramo.
    3. Timo Henckel, 2006. "Monopolistic Unions, Brainard Uncertainty, And Optimal Monetary Policy," CAMA Working Papers 2006-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
    5. Lawler, Phillip, 2007. "Strategic wage setting, inflation uncertainty and optimal delegation," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1105-1118, December.
    6. Phillip Lawler & Jonathan James, 2005. "Macroeconomic Shocks and Central Bank Disclosure Policy: Is increased Transparency Necessarily Beneficial?," Money Macro and Finance (MMF) Research Group Conference 2005 27, Money Macro and Finance Research Group.
    7. Kobayashi, Teruyoshi, 2003. "Multiplicative uncertainty in a model without inflationary bias," Economics Letters, Elsevier, vol. 80(3), pages 317-321, September.
    8. Gauti B. Eggertsson & Eric Le Borgne, 2003. "A Political Agency Theory of Central Bank Independence," IMF Working Papers 03/144, International Monetary Fund.
    9. Giovanni Di Bartolomeo & Marco Manzo, 2008. "Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective," Working Papers 0803, University of Crete, Department of Economics.
    10. Hermann Sintim-Aboagye, 2005. "Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models," Economic Change and Restructuring, Springer, vol. 38(2), pages 167-178, June.
    11. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.
    12. Margaret Bray & Charles Goodhart, 2002. "You might as well be hung for a sheep as a lamb: the loss function of an agent," LSE Research Online Documents on Economics 24937, London School of Economics and Political Science, LSE Library.

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